Initiating Coverage of Cipher Pharma
Jason Napodano, CFA
We are initiating coverage of
Cipher Pharmaceuticals Inc. (
with an 'Outperform' rating and $2.25 price target, or a market
capitalization of $50 million. Cipher currently trades with a
market capitalization of only $16 million. We believe the
story is largely de-risked and under-appreciated by the Street.
Cipher currently has two revenue streams in place with royalties
and milestones on sales of Lipofen (CIP-fenofibrate) at Kowa Pharma
in the U.S. and the recently launched ConZip (CIP-tramadol-ER) at
Vertical Pharma in the U.S. We expect a third royalty and milestone
stream from the launch of Durela (CIP-tramadol-ER) at Medical
Futures within the next few months.
We have established what we believe to be conservative forecasts
for these revenue streams going forward to patent expiration on
each product, Lipofen (Q1-2015) and ConZip/Durela (2022). We remind
investors that Cipher has little to no ongoing costs associated
with either product. Therefore, the best way to value these revenue
streams is through the net present value (
) of the cash flows using a 20% discount rate. We believe royalties
and milestones on Lipofen are worth approximately $7 million in
value. Royalties and milestones on ConZip / Durela are worth
another $8 million in value. Finally, we forecast that Cipher will
exit 2011 with approximately $9 million in cash and equivalents.
…CIP-Isotretinoin Offers Big Upside…
Based on our model, the stock is currently trading below the net
present value of the cash flows from Lipofen and ConZip / Durela,
plus the cash on hand. That means investors can purchase the stock
today and get the CIP-Isotretinoin product, a potential $200
million opportunity in the U.S., for free. Cipher has licenses the
rights to CIP-Isotretinoin to Ranbaxy, a major player in the
generic Isotretinoin market with branded Sotret. Sotret posted U.S.
sales over $120 million in 2008 prior to the FDA mandating a recall
on the product due to quality control / GMP issues at the company's
plant in India. We believe that Cipher's CIP-Isotretinoin, with its
superior absorption and bioavailability characteristics will move
into the primary detail position for Ranbaxy's efforts around
Cipher is entitled to receive a mid-teens royalty on sales of
CIP-Isotretinoin at Ranbaxy, along with the potential for $19
million in milestones ($9 million upon approval and two $5 million
cumulative sales related) with roughly 50% economics to Cipher
after it pays the sub-royalty to Galephar.
Cipher becomes a different company with CIP-Isotretinoin on the
market in the U.S. By 2016, the royalties on CIP-Isotretinoin alone
will account for greater than 80% of the top-line.
We also remind investors that Cipher has filed an application for
approval with Health Canada. We estimate the Canadian opportunity
with CIP-Isotretinoin is around $10 million, and we expect that
Cipher will seek to commercialize the drug on its own through the
formation of a small internal sales force of 6 to 8
representatives. We assume Canadian approval in mid-2013.
…Keep Risks In Mind…
Approval of CIP-Isotretinoin is paramount to our investment thesis.
The application is not without risks however. The U.S. FDA has
rejected Cipher's NDA on CIP-Isotretinoin twice in the past five
years. The second letter called for Cipher to conduct a phase 3
safety trial, which Cipher completed and presented data on in June
Of the 925 patients who enrolled in the study, 813 patients
completed the 20-week trial. The safety data revealed no overall
statistical differences in the adverse event profile or the
pharmacokinetics between CIP-Isotretinoin and a commercially
available generic Isotretinoin product. Unfortunately, the efficacy
component offers mixed results. The efficacy component of the study
had two co-primary endpoints: 1) the total change in lesion counts
between baseline and at the end of week 20; and 2) the total number
of subjects that had at least a 90% clearing at the end of 20 weeks
of treatment. These two co-primary endpoints were analyzed using
the per-protocol population (PP) as well as the intent-to-treat
) last observation carry forward (LOCF).
In the PP analysis, both co-primary endpoints met the
non-inferiority margins established for the study. In the LOCF
analysis of the ITT population, the first primary endpoint (total
change in lesion count) was achieved while the second endpoint (at
least 90% clearing) fell narrowly (less than 0.5%) outside the
non-inferiority margin target. However, we do not believe this will
be an issue to hold up approval in the U.S. We think the FDA was
far more interested in the safety analysis from the trial. The
trial was set up as a safety and PK analysis. The FDA has
traditionally approved reformulations in the past on PK /
bioavailability data alone. Cipher went above and beyond a
traditional reformulation application by conducting the extensive
safety analysis requested by the agency. However, a missed endpoint
presents risk, and this is the single biggest risk to owning the
stock ahead of the May 29, 2012 U.S. FDA PDUFA action date.
DCF Model Shows Fair-Value at $2.25
We have conducted a discounted cash flow (DCF) analysis to value
the shares of Cipher Pharmaceuticals Inc. Above we note that our
NPV / Sum-of-Parts analysis for the cash flow from Lipofen and
ConZip / Durela alone shows a market value of $23.8 million.
However, this is just to give investors a sense of the downside to
the Cipher story. At today's value, the stock is trading on the
present value of these cash flows. We see little downside in the
stock price as long as Lipofen and ConZip / Durela meet our
Upside comes with the approval of CIP-Isotretinoin. Cipher will
receive a net $4.5 million cash payment from Ranbaxy if the U.S.
FDA approves CIP-Isotretinoin. Our model (posted below) shows that
operating cash flow should turn positive immediately after the
approval of CIP-Isotretinoin. That means that by the end of 2012,
Cipher could be collecting revenues from three approved products in
the U.S., with a growing cash balance of over $10 million in the
bank, and generating positive cash flow. We think that this
presents the clear opportunity to in-licenses yet another
505(b)(2)-like product for late-stage development and
commercialization in 2013. We would be buyers of Cipher's stock
today, ahead of what we see as a transformational 2012 coming with
the potential approval of CIP-Isotretinoin. Our rating is
with DND as the subject to request a
copy of the full research report.
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