J. Smart & Co. (Contractors) PLC Q3 2024 Earnings Call Transcript

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November 8, 2024

There are 7 speakers on the call.

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Cipher Pharmaceuticals Quarterly Conference Call for the Company's Q3 twenty twenty four Results. At this time, all participants are in a listen only mode. Following today's presentation, instructions will be given for the question and answer session. As a reminder, this conference is being recorded today, Friday, November 8, 2024.

Operator

On behalf of the speakers that follow, listeners are cautioned that today's presentation and the responses to questions may contain forward looking statements within the meaning of the Safe Harbor provisions of the Canadian provincial securities laws. Forward looking statements involve risks and uncertainties and undue reliance should not be placed on such statements. Certain material factors or assumptions are implied in making forward looking statements and actual results may differ materially from those expressed or implied in such statements. For additional information about factors that could cause results to vary, please refer to the risks identified in the company's annual information form and other filings with Canadian regulatory authorities. Except as required by Canadian securities laws, the company does not undertake to update any forward looking statements.

Operator

Such statements speak as only of the date made. And I would like to turn the call over to Mr. Craig Mahl, Interim Chief Executive Officer of the company. Please go ahead, sir.

Speaker 1

Good morning, everyone, and thank you for joining us today. Before I begin, I'd like to remind everyone that all figures discussed on today's call are based on U. S. Dollars unless otherwise specified. I will limit my commentary on our Q3 financial results as our Chief Financial Officer, Ryan Mahling, will walk through these results in a few minutes.

Speaker 1

I'd like to spend my time to provide you an update on our recent acquisition of the Nautrova business in the U. S. And highlight our strategy moving forward for the combined business, which represents an exciting phase of growth for Cipher. On Monday, July 29, Cipher Pharmaceuticals announced the acquisition of Natroba, its authorized generic spinosad and its U. S.-based commercial infrastructure headquartered in Carmel, Indiana from the former owner Paraprove.

Speaker 1

With the Natroba acquisition completed and the business having been part of Cipher's overall business for the past 3 months, we continue to be excited about Cipher's new phase of growth. During the Q3, we have been diligently integrating the business into the existing Cipher infrastructure. We have made great progress and see tremendous opportunity, Ed. The combined business provides Cipher with a North American platform whereby we have strategy to build and expand upon. Having recently spent time engaging with our U.

Speaker 1

S. Sales team, I'm highly impressed with the talent and drive of our new Cipher employees and I'm confident in our ability to utilize the U. S. Sales team's capabilities to organically grow the Natroba business as well as inorganically grow Cipher's U. S.

Speaker 1

Business with our future strategy to acquire complementary products for the team's product portfolio. Shortly after completing the acquisition and building upon the business, we immediately put in place and began executing on plans to in source sales in certain states away from a prior co promotion partner of ParaPro. This transition was necessary given the end of the 2024 calendar year being the end of the term of the existing arrangement between ParaPro and this co promotion partner. During the Q3, Cipher has experienced an impact on its sales and earnings in comparison to historical sales and our expectations of the business. We believe this transitionary impact with the co promotion partner is temporary and will be completed shortly by the end of 2024.

Speaker 1

In 2025, we believe the transition will not only help grow the Natroba business sales, but also have a highly positive impact with reduced costs and higher earnings from the business moving forward. In addition to our strategy to organically grow sales of Natroba and its authorized generic spinosad in the U. S, Cipher intends to outlicense Natroba globally, particularly in warm regions where there is a high unmet need as well as bring the product to Canada leveraging our Canadian direct sales platform. Natrobo will fit well with our dermatology product portfolio in Canada including Epuris, the Canadian market leader for the treatment of severe acne. We have established relationships in dermatology in Canada and we believe this will be a natural fit for NATROVA.

Speaker 1

We are currently evaluating our commercial strategy to market Natroba in Canada and will progress to regulatory steps with Health Canada in the Q1 of 2025. Earlier, I briefly touched on the addition of complementary products to the U. S. Sales team product portfolio. And I'd like to expand on this portion of our strategy.

Speaker 1

There are opportunities to cross pollinate our existing portfolio of products as well as to in license new products that fit well into our expertise in dermatology and infectious diseases. Cipher's business strategy includes inorganic growth through further acquisitions and we intend to acquire complementary dermatology products to add to our North American platform. In simple terms, we believe our U. S. Sales team require additional products with the same call point in order to be efficient.

Speaker 1

We are currently pursuing a number of opportunities in this area. In order to support our business development activities, including out licensing Natroba and acquiring complementary products, we have added to Cipher's management team to provide additional depth in the area of business development and commercial activities. On October 8 this year, the company announced the appointment of Doctor. Hamed Ghani as its Chief Business Officer. Doctor.

Speaker 1

Ghani brings 15 years of experience in specialty pharmaceuticals, venture funds and healthcare investment banking. We expect his expertise in business development, including extensive experience with licensing deals and other M and A opportunities in the specialty pharmaceuticals and healthcare industry to provide meaningful contributions to Cipher's next phase of substantial growth. We are thrilled that Doctor. Gani has joined the team and he is already hard at work evaluating and pursuing opportunities for Cipher. I will now turn my comments to our pipeline product MOB-fifteen and the update we previously provided on the product candidate during the quarter.

Speaker 1

On September 13, our partner, Moburg Pharma issued a news release stating that it had received information about clinical cure in a subset of patients in its ongoing North American Phase 3 study for MOB-fifteen. Moberg noted that the number of patients who have achieved clinical cure in this blinded subset of patients is lower than its expectations, which necessitated that Moberg informed the market about this fact. Clinical cure is one of 3 parameters that together make up the study's primary treatment goal, complete cure. All three parameters clinical cure, negative fungal culture and negative microscopy need to be met for a patient to be considered completely cured. Moberg has reported that other than clinical cure, no information has been obtained about the other study parameters included in the complete cure.

Speaker 1

Despite the setback Moberg announced related to their Phase 3 study, we believe potential for this product remains for the following reasons. Firstly, MOB-fifteen has already obtained European Union approvals with the existing dosing regimen and in fact launched earlier this year the Terclara brand in Sweden, whereby it quickly gained 30% market share in value and 31% market share in units. But more importantly, Moberg has reported that since the introduction of Tericlara, the total market in Sweden has grown 52% compared to the same period last year. Secondly, the ongoing North American Phase 3 study is still not completed and if positive results over the already European product labeling are achieved, it would improve the labeling related to dosing in North America, which would serve to have positive impact on the products commercial outlook in Canada. Thirdly, the market potential for MOB-fifteen in Canada is favorable with a total prescription market for onychomycosis or nail fungus in Canada is approximately CAD92 million of which one product has over 97% of the market.

Speaker 1

Lastly, the terms of Cipher's licensing agreement with Moberg had an upfront payment of $500,000 with all additional payments of up to $14,000,000 being contingent upon successful achievement of certain clinical data results as well as development, regulatory and commercial sales milestones. Accordingly, Cipher has no further financial obligations related to the current licensing agreement. If the applicable development and regulatory milestones outlined in the agreement are not attained. We will continue to collaborate with our partner, Moberg, as full results from the North American Phase 3 study become available. Our second product that I would like to provide a brief update on today is piclodenosine CF101, a treatment for moderate to severe plaque psoriasis, which is being developed by our partner CanFeet Biopharma.

Speaker 1

As we have previously updated on, CanFeet has successfully completed the Phase 1st Phase 3 study for biclodenosine in 5 22 patients with moderate to severe chronic plaque psoriasis. Piclodenosine demonstrated efficiency responses that increased over time alongside favorable safety profile endpoints. The company will start enrolling patients very shortly for the 2nd pivotal Phase 3 clinical trial with the top line results expected in the second half of twenty twenty six. CanFeet had previously confirmed that upon positive conclusion of the Phase 3 program, CanFeet plans to submit a new drug application to the U. S.

Speaker 1

FDA. CanFeet and Cipher are in discussions regarding the expansion of their partnership for piclodenosine and other indications and territorial expansion into the U. S. To wrap up my commentary, I will briefly summarize the main items. We are well on our way to integrating the acquired Natrobit business into Cipher's existing infrastructure.

Speaker 1

In the Natrobit business, there is an ongoing transition with respects to the commercial structure of the spinosad authorized generic product whereby the arrangement with Parapro prior Parapro's prior co promotion partner is coming to an end. And Cipher will be in sourcing these sales. We are formulating plans and exploring opportunities to both organically and inorganically build upon our newly established North American platform. And we are continuing to work with our partners on Cipher's current product pipeline. Company has begun its new phase of substantial growth with the acquisition of Natroba and look forward to answering your questions after our prepared remarks.

Speaker 1

I will now pass the call over to our CFO, Ryan Mailing, for an overview of the financial results. Ryan, please go ahead.

Speaker 2

Thank you, Craig, and good morning, everyone. As a reminder, all amounts provided during this call are in U. S. Dollars unless otherwise noted. Today, Cipher Pharmaceuticals is reporting results from the company's 3 9 month periods ended September 30, 2024.

Speaker 2

Total net revenue for the 3 9 month periods ended September 30, 2024 was $10,400,000 $21,500,000 respectively. Net revenue from the 3rd quarter increased by $4,300,000 or 71% compared to the same quarter in the prior year. Net revenue for the 9 month period ended September 30, 2024 increased by $5,300,000 or 33 percent. Overall licensing revenue was $1,100,000 for the Q3 of 2024 $5,300,000 for the year to date September 30, 2024, compared to $3,100,000 $6,900,000 respectively in the prior year. This represents a decrease of 66% for the quarter and 24% for the year to date respectively compared to the same periods in the prior year.

Speaker 2

Licensing revenue from Absorica in the U. S. Was $600,000 in the Q3 of 2024 $3,700,000 for the year to date September 30, 2024, representing a decrease of 76% for the quarter and 27% for the year to date, respectively, compared to the same periods in 2023. This decrease in Absorica licensing revenue was primarily attributable to significantly lower product shipments in the Q3 of 2024 compared to the same period in 2023. The company earns revenue from supplying product to its distribution partner, of which the volume of these shipments was higher in the Q3 of 2023 as a result of a market dynamic where a generic competitor exited the market.

Speaker 2

Market share for the overall Absorica portfolio has decreased by 0.8 percent to 6.1% as of September 30, 2024 compared to 6.9% market share at September 30, 2023 according to Symphony Health market data. Licensing revenue from Lipofin and the Lipofin authorized generic was $400,000 for the Q3 of 2024 and $1,500,000 for the year to date September 30, 2024, a decrease of $100,000 for the quarter and $200,000 for the year to date respectively compared to the same periods in the prior year. The decrease for both periods was driven by lower sales volumes and net sales realized by the company's distribution partner for these products on which Cipher earns a royalty. Moving on to product sales, total product revenue for the 3 9 month periods ended September 30, 2024 was $9,300,000 $6,300,000 respectively, an increase of $6,300,000 or 2 13% and $7,000,000 or 75% respectively from the comparable periods in 2023. The increase in product sales was primarily driven by the incremental revenue from Netroba and its authorized generic spinosad, which were acquired by Cipher and its recently completed acquisition at the end of July 2024.

Speaker 2

Product revenue from Netrova and its authorized generic spinosad was $5,500,000 for both the quarter year to date September 30, 2024. Additionally, product revenue for both the quarter year to date September 30, 2024 included higher Apirus sales when compared to the same periods in the prior year. Product revenue from Apirus was $3,400,000 for the Q3 of 2024 $9,500,000 for the year to date September 30, 2024, an increase of $900,000 or 32% and $1,500,000 or 19% respectively compared to the same periods in 2023. The increase in revenue from Apirus for both periods was attributable to increased sales volumes. Market share for Apirus has increased by 4.2% to 50.3% at September 30, 2024, up from 46.1 percent market share at September 30, 2023 according to IQVIA market data, which contributed to an overall increase in sales volumes.

Speaker 2

We've experienced an increase in gross margin on our product revenue of 15% to 79% gross margin for the Q3 of 2024 compared to 64% for the same period in the prior year. This gross margin increase results from the addition of the NETROVA and SPINOSAD authorized generic products during the quarter, which is a combined gross margin of approximately 85%. Selling, general and administrative expenses was $6,200,000 for the Q3 of 2024, an increase of $4,500,000 for the same period in the prior year. The increase is primarily attributable to the Natrobo business including acquisition, restructuring and other costs incurred in connection with the acquisition of this business, as well as the incremental operating costs of this recently acquired business during the quarter, including salaries and benefits costs for the commercial sales team. Also included within acquisition restructuring and other costs during the Q3 of 2024 is the cost associated with the ongoing transition of the prior spinosat authorized generic co promotion partner expected to be completed by the end of 2024, which Craig mentioned earlier in his remarks.

Speaker 2

Further contributing to the increase in selling, general and administrative expenses for the quarter was higher professional fees incurred in Cipher's existing business in comparison to the same period in 2023. Given the nature of professional fees as situational, necessary and temporary, we do not believe these to be indicative of our past history of managing the cost of our business. Selling, general and administrative expenses for the 9 months ended September 30, 2024 was $9,300,000 an increase of $4,900,000 from the $4,400,000 reported in the 9 months ended September 30, 2023. This increase was due to a combination of the incremental cost incurred related to the Natroba acquisition, which occurred during the Q3 and operations of the acquired business for the remainder of the quarter, as well as increased professional fees and other general expenses incurred in Cipher's existing business, partially offset by lower non cash share based compensation. Adjusted EBITDA for the 3 9 months period ended September 30, 2024 was $4,100,000 $10,700,000 respectively, compared to $3,600,000 $9,900,000 respectively for the comparative periods ended September 30, 2023.

Speaker 2

Our business ended the quarter with $9,500,000 in cash on hand after utilizing $40,000,000 of cash that was on hand during the quarter to partially fund our acquisition of the Natroba business. Additionally, the company drew down $40,000,000 from its new revolving credit facility with National Bank to combine with the $40,000,000 of cash on hand fund the $80,000,000 cash portion of our Natroba acquisition. National Bank has provided Cipher with a total $65,000,000 revolving credit facility with an additional $25,000,000 conditional accordion feature available. As at September 30, 2024, dollars 40,000,000 of principal from this revolving credit facility remained outstanding. However, the credit facility terms were designed to allow for maximum flexibility, both with principal repayments and interest rates.

Speaker 2

This provides Cipher the ability to actively manage its leverage while maintaining substantial additional capability to finance our future acquisitions on favorable financing terms. Cipher's balance sheet, low leverage profile and ongoing available liquidity places the company in an excellent position to execute on its growth objectives. As Craig mentioned earlier, the company is in an exciting phase of growth and we look forward to announcing our progress as new milestones are achieved. We will now open the call up to questions. Also joining us for this question period is Brian Jacobs, President of U.

Speaker 2

S. Operations.

Operator

Thank you, you. First, we will hear from Andrey Uddin at Research Capital. Please go ahead.

Speaker 3

Thanks, operator. Hi, Craig, Brian and Ryan. Just wondering when do you

Speaker 4

think you'll add more U. S. Reps for your U. S. Uncovered regions?

Speaker 5

Hey, Andre, how are you doing this morning? Hi, Brian. Brian Jacobs here. What are we going to so we just talked about how we were in the process of transitioning away from a co promotion partner that brought on additional sales reps and a district manager. So and that was already in place when we acquired the business.

Speaker 5

We're looking in place when we acquired the business. We're looking just to kind of maximize the efficiency of that new team, which has kind of grown pretty recently before we kind of look to expand upon and add more reps. So it's really the footprint that we, call it, acquired when we acquired the business. And for context, the number of outside sales reps we have is around 30 at the present time. So we're looking for it to gain to really just train, get them efficient, up and running, and that's kind of our near term.

Speaker 3

And that's great. And so based on your comments, it seems fair to say that you've identified some potential products that would fit with Natroba. Is that fair?

Speaker 1

Yes. That's Barry, Andres. It's Craig here.

Speaker 3

And just in terms of I know business development is always hard to time. But when do you think you could forge

Speaker 4

your first out licensing deal

Speaker 3

for Natrova?

Speaker 1

Well, last week, Hamed Gandhi attended a conference in Europe. I think it was called Bio Europe and he is reporting that he's received a fair amount of interest and we'll be pursuing those leads in the coming months.

Speaker 3

Okay, that's it. That's great. Thanks.

Operator

Thank you. Next question will be from Justin Keywood at Stifel. Please go ahead.

Speaker 4

Good morning. Thanks for taking my call. Some moving parts in the quarter. Should we expect Q4 to show a more normalized situation of how the business looks with Natroba, including net income and the potential use of tax loss credits as far as translating to free cash flow growth?

Speaker 5

Hey, Justin. It's Brian Jacobs here. Good morning. Let me kind of break that apart into 2. So the first on Natroba, we do we are going to continue to have some transition from that co promotion partner.

Speaker 5

Again, that was an item that was kind of in play that we inherited when we inherited the business. So really, we believe our what you're kind of seeing kind of for a run rate in 2024 is going to continue. And it won't be until 2025 until the Q1 of 2025 until we're kind of fully transitioned off of that. So I think that's the way to think about the Natrova business. And then on the utilization of tax losses, that's kind of unchanged from what we had talked about or disclosed previously.

Speaker 5

We believe that we've structured the transaction in a tax efficient manner, and we should be able to utilize tax losses efficiently from the combined business.

Speaker 4

Thank you. Was there any particular elements in Q3 where those tax losses were not able to be utilized?

Speaker 2

Nothing in particular. We continue to utilize those losses in the quarter. So yes, nothing is really unchanged from prior quarters.

Speaker 4

Okay. And then on potential M and A in utilizing that U. S. Infrastructure, are you able to update us on the pipeline as far as the amount of potential transactions, the size of deals that you're looking at and any indication on multiples as well? Thank you.

Speaker 1

Justin, Craig here. I would say that we've got 2 to 3 serious opportunities that we are currently working on. I'm not sure any of them will come to bear, just given that the fact that where we're at in the negotiation, but I'm feeling quite optimistic. In addition to that, we've probably looked at 6 to 8 other opportunities and have arrived at these three opportunities that we think would fit well with the current sales force in their call points. I think it's a little early to comment on multiples.

Speaker 1

It's likely that these arrangements will be licensing deals, where it's more of a royalty payment as opposed to a capital requirement on an acquisition. If there is acquisitions, I would say that, first of all, they would have to be complementary to Natroba and fit well with our geographic distribution in the U. S. Did I answer your question, Justin?

Speaker 4

Thank you. Appreciate it. So on the maybe to look at it, these 2 or 3 acquisitions in advanced stages, how much maybe revenue or EBITDA contribution would that combined total be or any particular asset? Just to give a sense of what the potential impact could be.

Speaker 1

We're looking at assets that would be generating over $30,000,000 a year in revenue. I'm yet to get to the EBITDA figure and that's kind of part of the modeling that we're doing currently on these deals.

Speaker 4

Great. And just one more timing of potential execution on these transactions. Is it more of a 2025 scenario?

Speaker 1

Yes, I believe 2025. These deals as you may have heard it take longer than one expects.

Speaker 4

Okay, great. Thank you for taking my questions.

Operator

Thanks. Thank you. Next is Doug Loe at Leeds Financial. Please go ahead.

Speaker 6

Yes. Thanks, operator, and good morning, gents. Nobody's asked an Absorica question yet, so I guess I will. The bottom kind of fell out of your royalties in Q3 and just kind of want to get a sense of what feedback you're getting from Sun Pharma as to how it's projecting Absorica sales to roll out over the next few quarters.

Speaker 1

Doug, Craig here. Just to reiterate, the Q3 2023 was a particularly good quarter for Absorica where Sun had ordered a lot of product. I think that they had been short in previous periods, so they were making up. So I think that Q3 2023 was a bit of an outlier. We expect that things will be reasonably stable there.

Speaker 1

We're in discussions with Sun about their pricing strategy in the generic market in the U. S. I think that it's a typical generic product there. It's not likely to be growing, but we hope that the slowdown with the product is going to meet kind of an endpoint and stabilize from here going forward.

Speaker 6

Okay. Yes, fair enough. And then just kind of shifting gears to your existing partnered portfolio with MOB-fifteen and piclidimazone, thanks for the commentary there. I just want if you have any feedback from Moberg as to what their issues were with their ongoing Phase 3 study? I mean, it smelled at the time like it was a QAQC issue with the formulation that they were testing in that trial, given that it's already approved in other markets.

Speaker 6

Any commentary there on how the train fell off the rails on that trial would be helpful. And then with piclodenozone, it's pretty clear if you're looking at Camfeet's financial results that they don't really have the existing capital to fund a well designed Phase 3 plaque psoriasis study. So just wondering if you had any feedback from them as to the sources of capital or sources of new partnerships that might be able to drive that trial forward over a timeframe that you shared in your opening remarks? And I'll leave it there. Thanks.

Speaker 1

Let me start with the Moberg question first. We haven't been given a great deal of insight as to the results that were, I guess, miscommunicated to Moberg with that subset of patients I referred to. I think the concern there is that they're not getting the cosmetic cure rate that they had hoped for and that's affecting the overall the complete cure results. In looking at it and we've been out speaking with physicians a lot about a great deal about this is that the guidelines talk about a complete cure rate as being the endpoint that people should be looking for. But they don't really comment much on the how important is the mycological cure rate.

Speaker 1

And what we're hearing from dermatologists and family docs that the mycological cure rate in different sets of patients is more important. Like for example, the elderly or which where narrow fungus is highly prevalent and also in diabetic patients where their disease is causing them not to be able to get cured using the existing product. And so we're seeing doctors starting to segment their patients in this way. So we're feeling more and more confident that the Molbark product has legs for the Canadian market, particularly with the performance that they've achieved in Sweden. So I believe there's a compelling case, but we're still doing our analysis about how we would how if we will launch and how we will launch that product in Canada.

Speaker 1

Turning to the CanFeet product, the piclodenosine product. Yes, we're following CanFeet and then from what we're hearing is that they're in the process of raising additional funds for that second Phase 3 pivotal trial that they're intending to get to conduct in the U. S. So we're keeping in touch with them. We understand that it's a relatively small company.

Speaker 1

They've had previous success. And I believe that they're intending to raise additional money to continue with the Phase 3 study.

Speaker 6

Yes, fair enough. Thanks, Greg.

Speaker 1

Thanks.

Operator

Thank you. And at this time, I would like to turn the call back over to Mr. Mahl.

Speaker 1

Before signing off, I'd like to take this opportunity to thank our team members in both our U. S. Office in Carmel, Indiana and our Canadian head office in Mississauga for their ongoing hard work and dedication towards the integration of the Natrobit business into Cipher and their focus on activities that will support our future growth. We are now in the early stages of what I see being an exciting journey as we build the North America's next newly successful specialty pharma company. Thank you all for joining us today.

Operator

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we ask that you please disconnect your lines.

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