Cipher Pharmaceuticals Inc. (CPH) Earnings Call Transcript

Good morning, everyone, and thanks for holding. I'd like to welcome you to the quarterly conference call of Cipher Pharmaceuticals covering the company's Q2 2025 results. Right now, everyone participating is in listen-only mode. After the presentation today, we'll provide instructions for the question and answer session. Should you require assistance at any point during the call, please press star then zero on your touch-tone phone. Please note that this conference is being recorded today, Friday, August 8, 2025. On behalf of the speakers who follow, listeners should be advised that this presentation and the answers to questions may include forward-looking statements as defined under the safe harbor provisions of the Canadian Provincial Securities Laws. Such forward-looking statements carry risks and uncertainties, and you should not place undue reliance on them. Various material factors or assumptions are implied when forward-looking statements are made, and actual results could differ materially from those expressed or implied in them. For further details on factors that might cause results to differ, please see the risks identified in the company's annual information form and other filings with Canadian regulatory authorities. Other than as required by Canadian Securities Laws, the company does not commit to updating any forward-looking statements.

Remarks of that kind are valid only as of when they were given. At this point I'd like to hand things over to Mr. Craig Mull, the company's Interim Chief Executive Officer. Mr. Mull, the floor is yours.

Good morning, everyone, and thanks for holding. I'd like to welcome you to Cipher's quarterly conference call covering the company's Q2 2025 results. Right now, everyone attending is in a listen-only mode. After the presentation today, we'll give you instructions for the question and answer session. Should you require help at any point during the call, just press the star key and then zero on your touch-tone phone. Please be aware that this conference is being recorded today, Friday, August 8th 2025. On behalf of the speakers who follow, listeners should note that today's presentation and the answers to questions might include forward-looking statements as defined under the safe harbor provisions of the Canadian Provincial Security Laws. Such forward-looking statements carry risks and uncertainties, and you shouldn't place undue reliance on them. Making forward-looking statements implies certain material factors or assumptions, and actual results could differ materially from what those statements express or imply. To learn more about the factors that might cause results to vary, please see the risks identified in the company's annual information form and other filings with the Canadian regulatory authorities. Unless the Canadian Securities Laws require it, the company does not commit to updating any forward-looking statements.

Those remarks reflect the situation only as of when they were given. Once more, good morning, and thank you for being with us. Prior to starting, I want to remind everybody that, unless stated otherwise, every figure we discuss on this call is denominated in US dollars. For total net revenue, the second quarter of 2025 delivered the strongest earnings quarter in Cipher's history. That result came from robust performance in the U.S. NATROBA business, which beat the initial expectations we had when we acquired it one year ago, together with Cipher's base business turning in results modestly above the same quarter a year earlier. To start, I'd like to devote some time to the highlights of the U.S. NATROBA business. Revenue reached $7.8 million in the second quarter of 2025, exceeding what we expected at the time we bought the business a year ago, in July 2024. Because of the product's seasonality, the second quarter showed a build-up toward the warmer months of the year, when demand is higher, and sales therefore rose meaningfully versus the first quarter. In our view, the second quarter has set the business up well for additional success as we move into the third quarter, which traditionally brings high demand for the products.

For the six months of this fiscal year so far, NATROBA products brought in $14.4 million in revenues. On top of that, the NATROBA business delivered $6.6 million in gross profit, along with an 86% gross margin once non-cash adjustments are excluded. As I noted on earlier earnings calls, we finished acquiring the business out of the legacy arrangements that existed when the acquisition happened, and those results keep paying off for the business in Q2 2025 through this robust gross margin figure. As we laid out on our first quarter earnings call, our growth strategy for NATROBA remains four-fold. First, growing the business in the U.S., where studies have demonstrated that permethrin-based products no longer work because of resistance issues. Second, bringing complementary products onto the U.S. sales platform by means of in-licensing, co-promote agreements, or acquisition. Third, introducing NATROBA in Canada using our existing Canadian infrastructure. Finally, out-licensing the product around the world, since the resistance problem isn't confined to North America — it's a global one. On the first pillar of that strategy, we announced in April during the quarter that Illinois designated NATROBA as the preferred product of choice, citing its one-dose complete cure for scabies and the fact that the incumbent treatment, permethrin 5%, is now non-preferred under Illinois Medicaid.

We keep working with a range of states, aiming to extend the positive progress we've seen in Illinois, since we hold a substantial number of Medicaid reimbursement arrangements throughout the U.S. Turning to the second part of our strategy — bringing complementary products onto the U.S. sales platform — we are advancing in pinpointing those products and have begun talks regarding several potential opportunities. Regarding the third element of our strategy, the launch of NATROBA in Canada, throughout the second quarter we kept moving forward with preparations for our submission to Health Canada seeking approval of NATROBA. Given these efforts, we plan to file our new drug submission during the fourth quarter of 2025. We think NATROBA will address an unmet need in Canada for a highly effective treatment of head lice and scabies, and we'll keep sharing updates as things develop regarding the Canadian launch of NATROBA. As for the fourth part of our strategy, we are likewise still pursuing opportunities for NATROBA around the world, as we've noted on previous earnings calls. We remain of the view that a high unmet need exists for a highly effective product such as NATROBA to treat lice and scabies indications in other territories globally, and the product is especially well-suited to warm climate regions.

Like we've mentioned before, developing business takes time and might not pan out, since we feel it's key to secure the appropriate match for out-licensing NATROBA. So we keep being patient in that part of our strategy, making sure we're pursuing opportunities that will bring growth to Cipher. Whenever there's progress on out-licensing NATROBA around the world, we'll keep sharing updates. Now moving to our base business, which is made up of the Canadian product portfolio and the U.S. licensing portfolio, revenues and earnings came in above the prior year, and this business keeps producing dependable results and cash generation. Total revenues of $5.6 million from our base business of Canadian product revenue and U.S. licensing revenue came in $0.3 million, or 6%, above the second quarter of 2024. Gains in our Canadian-based product sales were partly offset by drops in licensing revenue. As Ryan Mailling will explain in more detail during his remarks, revenue from the Canadian product portfolio reached $0.4 million, or 12%, above the same quarter last year. The U.S. licensing business saw a decrease of $0.1 million, or 9%, driven by reduced royalty revenues stemming from lower sales volumes and net revenues our licensing partner achieved because of generic competition, including new generic entrants into the market tied to the products in the U.S., which combined with lower royalty rates.

That drop in licensing revenue tied to royalties was partly made up for by higher shipments during the quarter versus the same period a year earlier, since Cipher brings in revenue by supplying products to our distribution partners. Adjusted EBITDA from the base business came to $3.2 million in the second quarter of 2025, up 4% compared with the same quarter last year, and it remains a dependable source of cash flow. I'd also like to call attention to total adjusted EBITDA of $7.6 million for the second quarter of 2025 and $13.8 million for the year to date. The year-to-date adjusted EBITDA figure includes one-time legal costs of $1.2 million related to defending our product portfolio through a contractual arbitration process. We are still waiting on a decision from the arbitrator; even so, we feel it was prudent to defend our base business using the contractual mechanisms available to us and to await how this process plays out. Finally, because our operations remain a dependable source of cash generation, we will further show our track record of strong capital allocation going forward. In line with how we already manage capital and with our business strategy, we will deploy our available cash along with future cash generated by the business in a balanced approach across the following areas.

First, we buy back our common shares under the normal course issuer bid. Second, we pay down a portion of what is owed on the revolving credit facility and stay focused on creative acquisitions that deliver strong returns for shareholders. Last, I want to note that we are still quite active in pursuing additional strategic business development opportunities, with a particular emphasis on opportunities based in the U.S., including acquiring or in-licensing products that complement our existing portfolio as well as company acquisitions that are creative or that serve a specific strategic purpose. Identifying, evaluating, and pursuing various business development opportunities remains our focus, and we are in active discussions with a range of partners. That said, as we have noted previously, such discussions take time, and these opportunities may or may not come to realization, but we will keep providing updates as developments occur. Our approach to pursuing these opportunities will remain selective so that we execute on the right ones, as we successfully demonstrated with our NATROBA acquisition just a year ago. Thank you again for joining us today, and I look forward to taking your questions following our prepared remarks. I will now hand the call over to our CFO, Ryan Mailling.

Ryan, the floor is yours.

Thanks, Craig, and good morning to everyone. As Craig said at the start of today's call, every amount we provide is in US dollars unless we note otherwise. Today, Cipher Pharmaceuticals is reporting results for the company's second quarter and year to date, 2025 — the three and six-month periods ended June 30th, 2025. Total net revenue for the three and six-month periods ended June 30th, 2025, came in at $13.4 million and $25.4 million, respectively. Net revenue for the second quarter of 2025 rose by $8.1 million, or 152%, versus the same quarter in the prior year. Net revenue for the six-month period ended June 30th, 2025, grew by $14.2 million, or 127%, over the same period in 2024. Those increases were largely attributable to the addition of the NATROBA business at the end of July 2024, combined with higher revenue from our Canadian product portfolio in the current year. Product revenue from the NATROBA business, which is comprised of the brand NATROBA and its authorized generic spinosad, was $7.8 million and $14.4 million, respectively, for the three and six-month periods ended June 30, 2025, representing a significant portion of the total increase in product revenue, as I just described. Product revenue from the Canadian product portfolio for the second quarter and six months ended June 30th, 2025, was $4.1 million and $8.7 million, respectively.

Revenue from our Canadian product portfolio came in at $4.1 million for the second quarter of 2025, up $0.4 million, or 12%, from $3.7 million in the second quarter of 2024. Product revenue for the Canadian portfolio totaled $8.7 million for the six months ended June 30th, 2025 — a rise of $1.7 million, or 26%, versus $7 million in the same period a year earlier. On top of that, since sales for our Canadian product portfolio are denominated in Canadian dollars, translating them on a constant currency basis means Canadian product portfolio revenue for the six months ended June 30th, 2025, was affected by movements in the US dollar against the Canadian dollar. For the second quarter of 2025, that impact was nominal. Translated on a constant currency basis, Canadian product portfolio revenue grew by $2 million, which represents a 30% increase over the six months ended June 30th, 2024. The products that make up our Canadian product portfolio saw higher sales volumes for the three and six months ended June 30th, 2025, versus the same periods in the prior year, and that contributed to the overall revenue increase. Turning now to our U.S. licensing revenue, total licensing revenue for the three and six months ended June 30th, 2025, was $1.5 million and $2.2 million, respectively.

For the second quarter and the six months ended June 30th, 2025, licensing revenue fell by $0.1 million and $2 million, respectively, versus the corresponding periods in 2024. In the second quarter of 2025, total licensing revenue came to $1.5 million, which was a 9% decline from $1.6 million in the same quarter of 2024. That drop stems from the ABSORICA portfolio in the U.S., which generated $1 million of licensing revenue in the second quarter of 2025 — $0.1 million less than the $1.1 million recorded for the same quarter in 2024. The lower licensing revenue from the ABSORICA portfolio came about because of reduced royalty revenue, driven by smaller sales volumes and net sales achieved by our distribution partner, on which Cipher earns a net sales royalty, along with lower contractual royalty rates compared with the prior year. The royalty revenue decrease in the ABSORICA portfolio, however, was partly offset by product shipments that were $0.4 million higher during the second quarter of 2025 than in the same quarter last year, through which we earned revenue from supplying product to the distribution partner. For the six months ended June 30th, 2025, licensing revenue overall was $2.2 million, compared with $4.2 million in the same period a year earlier — a 48% decrease.

For the six months that ended June 30th, 2025, the drop came from the ABSORICA portfolio and Lipofen, including the authorized generic. Licensing revenue from ABSORICA came to $1.3 million for the six months ended June 30th, 2025 — a decrease of $1.7 million, or 56%, versus the same period a year earlier. Revenue from ABSORICA during that six-month period was affected by a year-over-year decline in product shipments, on which we earned revenue from supplying the product to our partner. The fall in Absorica portfolio licensing revenue for the six months ended June 30th, 2025, was also affected by lower royalty revenue, driven by lower sales volumes and net sales realized by our distribution partner, on which we earned a net sales royalty. Lower contractual royalty rates year-over-year contributed further. Market share for ABSORICA and the authorized generic of ABSORICA stood at 3% at June 30th, 2025, according to Symphony Health market data, a decrease of 3.4% compared to 6.4% at June 30th, 2024. Licensing revenue from Lipofen and the authorized generic was $0.8 million for the six months ended June 30th, 2025, which represents a decrease of $0.3 million compared to the same period in the prior year.

For the three and six months that concluded on June 30th, 2025, selling, general and administrative expenses came in at $4.1 million and $9 million, respectively. Those SG&A expenses in the second quarter of 2025, at $4.1 million, were up $2.5 million from the same quarter a year earlier. That rise came mainly from the additional selling, general and administrative costs tied to the NATROBA business we acquired. For the six months ended June 30th 2025, selling, general and administrative expenses of $9 million grew by $5.9 million versus the comparable period last year. This increase reflects $4.8 million of extra selling, general and administrative expenses from the acquired NATROBA business, along with $1.2 million in one-time legal costs incurred defending our product through a contractual arbitration process. Net income for the three months ended June 30th, 2025, reached $5.9 million, or $0.22 per diluted common share, versus $3 million, or $0.12 per diluted common share, in the same period a year earlier. For the six months ended June 30th 2025, net income was $8.5 million, or $0.32 per diluted common share, compared with $7.9 million, or $0.32 per diluted common share, for the same period in 2024.

For the six months that concluded on June 30th 2025, net income took a hit — and that was because of the $1.2 million in one-time legal costs tied to the contractual arbitration process that we mentioned earlier, plus $0.8 million of non-cash fair value adjustments on inventory picked up through the NATROBA acquisition, which showed up in cost of products sold for that period. Adjusted EBITDA came in at $7.6 million and $13.8 million for the three- and six-month periods ending June 30th 2025, respectively, versus $3.1 million and $6.6 million, respectively, in the same periods ending June 30th 2024. That works out to gains of 148% and 108%, respectively, for the second quarter and the six months ended June 30th 2025, measured against the same periods in 2024. Driving that adjusted EBITDA improvement was primarily the NATROBA business addition we referenced earlier along with growth in our Canadian product portfolio, partly offset by declines we saw in U.S. licensing revenue. As of the close of the second quarter of 2025, the company held $11.3 million in cash and carried $25 million in debt. We keep producing meaningful free cash flow from operations — $6 million in operating cash flow during the second quarter of 2025, and $10.2 million from operations across the six months ended June 30th 2025.

In Q2 2025, Cipher used $15 million from its accumulated cash to pay down its revolving credit facility, and it also spent an extra $2.1 million of accumulated cash on common share buybacks through our normal course issuer bid. After that second quarter, on August 6th 2025, Cipher directed part of the cash it had built up from free cash flows toward another repayment of $7 million against the outstanding balance on our revolving credit facility. As a result, following that payment, the company's debt balance on its revolving credit facility now stands at a reduced $18 million outstanding. Thanks to strong results from Cipher's NATROBA business along with Cipher's base business — especially its Canadian product portfolio, which is performing well — the overall business keeps generating meaningful cash. Both during and after the quarter, we showed effective capital allocation, returning capital to shareholders via the normal course issuer bid and further delevering the balance sheet through two debt repayments totaling $22 million. We also keep financing availability thanks to our credit facility's revolving nature: after these debt repayments, Cipher has $47 million of financing available, plus a $25 million accordion option, for $72 million of total potential financing available.

So with the robust cash flow Cipher is generating from operations, plus the financing we have available, the company remains in a strong position to pursue additional growth opportunities and deliver more value to our shareholders. At this point, we'll open up the call for questions.

Thank you. Ladies and gentlemen, the question and answer session is about to start. If you have a question, kindly press star then the one on your touch-tone phone. A prompt will tell you that your hand has been raised. If you would like to decline from the polling process, please press star then the two. When using a speakerphone, please lift the handset before pressing any keys. Kindly hold for a moment for your first question. Your first question is from Andre Uddin with Research Capital. Your line is now open.

Alright, thanks, operator. Hey there, Craig, Bryan, and Ryan. This is quarter. I've got a handful of questions here. Roughly speaking, do you happen to know what permethrin's yearly sales in Canada come to?

Hi Andre, Bryan here. We haven’t actually run any analysis on permethrin, clearly, since that’s a generic product. As for its sales level, we don’t think that would really tell us what we could capture once NATROBA is brought into Canada.

That's a reasonable point. You touched on some of this during the call as well, but where do things stand with your out-licensing talks for NATROBA? I realize business development is never easy to forecast, yet should we start looking for those out-licensing agreements in 2026?

That's possible, Andre. Craig here. Many parties have shown interest. The key question, I think, is what price we can achieve for the product in other jurisdictions. We've focused a great deal on that. We're also watching what happens with the Trump administration's plan, or the discussions, regarding most favored nation pricing. Getting caught in that is something we want to avoid — signing a deal in which we sell the product at a substantially lower price in another country and then fall under this most favored nation concept. Things are progressing well. Interest is definitely strong from various countries and from a number of different pharmaceutical companies that specialize in this area. I'd say an agreement being in place by the end of 2026 is likely for certain.

You touched on part of this during the call as well, but I was hoping you could expand on it a bit more. Beyond Illinois, how are those preferred step-through status conversations progressing on the Medicaid side when it comes to NATROBA?

Hey, Andre. Normally, we do have a chance to meet with each state's Medicaid program. As I believe you know, the way this is run is that each state handles it separately, and there's a saying out there — once you've seen one state's Medicaid plan, you've seen one state's Medicaid plan. Every one of them works in its own way. The best opening we get to have that conversation with them is at the point when contracts are put out for bid or for renewal. The majority of these will usually be up for renewal every year or every two years. That's the moment when we submit it. Here's an illustration of one approach: you aim to renew, and you collaborate with them to renew the contract. There's substantial volume and demand for the product in that state, so they wish to keep it in place. Obviously, we would negotiate a price increase or some form of an increase. They attempt to push back and squeeze that increase down. One of the areas where we get an opening is by saying, here's what your price would be on an annual bid renewal, but here's also what your price would be if you'd be willing to consider making our product the single preferred one on the formulary, as in Illinois. That's how we're pursuing that strategy.