Cipher Pharmaceuticals Inc. (CPH) Earnings Call Transcript

Good morning, everyone, and thanks for joining us. You're listening to the Cipher Pharmaceuticals quarterly conference call covering the company's Q3 2025 results. <<operator_script>> Please note that today's session, Friday, November 7, 2025, is being recorded. On behalf of everyone speaking, we want to caution listeners that this presentation, along with answers to your questions, may include forward-looking statements as defined under the safe harbor provisions of Canadian provincial securities laws. Such statements carry risks and uncertainties, so you shouldn't place undue reliance on them. Forward-looking statements rest on certain material factors or assumptions, and actual outcomes 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 described in the company's annual information form and its other filings with Canadian regulatory authorities. Unless Canadian securities laws require otherwise, the company assumes no obligation to update any forward-looking statements, which speak only as of the date they are made. I'll now hand the call over to Mr. Craig Mull, Interim Chief Executive Officer of the company. Please go ahead, Mr. Mull.

Good morning, everyone, and thanks for being with us today. Before I get started, I'd like to remind all of you that every figure we discuss on today's call is stated in U.S. dollars, unless we say otherwise. Cipher showed meaningful growth in the third quarter of 2025, and that was largely thanks to the addition and the performance of our U.S.-based Natroba business. Sales from Natroba and its authorized generic Spinosad came to $8.1 million in the third quarter of 2025, which is a 4% sequential increase over revenues of $7.8 million in the last quarter, in line with the product's seasonality, since head lice and scabies infections are generally more prevalent during the warmer months of the year. On top of that, the Natroba business continues to deliver strong profitability, with gross profit of $7 million and a gross margin percentage of 86% in the third quarter of 2025. Adjusted EBITDA from the Natroba business was a strong $5 million, and that contributed to our total combined business adjusted EBITDA of $7.3 million in the third quarter of 2025. In line with our past track record, our earnings translate directly into free cash flow, which has let us keep deleveraging the business. In the third quarter and after the quarter-end, we repaid a total of $17 million on our revolving credit facility, which now stands at a reduced balance of $8 million at the present time.

That is a remarkable accomplishment, considering we pulled $40 million from the revolving facility in order to purchase the Natroba business right at the close of July 2024. Ryan Mailling, our CFO, is going to walk through a detailed review of the financial results once I finish my comments. I want to use the rest of the time I have left to talk about our business development work, which keeps us quite busy and is where I am devoting most of my attention. At present we are running 4 separate strategies aimed at creating shareholder value and expanding our business. First, it is essential that we keep investing in and strengthening the Natroba business along with the U.S. operations so they are positioned for additional growth as we head into 2023. To complement the sales approach we already have, we will roll out a direct-to-consumer sales model early in 2023 — a strategy that a great many pharmaceutical manufacturers are adopting as a direct and modern way to sell into the U.S. market. We think Natroba is well suited to a direct-to-consumer sales model, since permethrin and related OTC products no longer offer an effective answer to what individual consumers and families dealing with head lice and scabies require. What they need is simply a better solution, along with the ability to obtain it quickly when the need arises.

Our platform is going to simplify how someone gets a prescription, adjudicate a claim efficiently, and give consumers a convenient option for local pickup or delivery. The strategy also involves partnering with retailers so that Natroba and Spinosad are adequately stocked in states and city centers throughout the U.S., ensuring availability through this platform. We're excited about our new DTC strategy, and more details on the rollout will come in the coming months. A second part of our business development strategy is that we're actively pursuing complementary products that can be commercialized directly through our existing U.S. sales force. Right now we're in active discussions with various parties, and we'll keep providing updates. That said, as with all business development opportunities, these activities take time and the opportunities may or may not come to realization. A third strategy we're pursuing is launching Natroba in Canada, and we're on track to submit our new drug submission to Health Canada during the fourth quarter of 2025. We believe Natroba will fill an unmet need in Canada for a highly effective treatment for head lice and scabies, and we'll continue to provide updates as developments occur with Health Canada's review and the submission process.

The fourth strategy I want to walk you through involves our active efforts to pursue out-licensing deals for Natroba on a global basis. We still believe an unmet need exists for a product as highly effective as Natroba when it comes to treating head lice and scabies indications in other regions around the world. That said, we think it matters to secure the right fit with whichever partner out-licenses Natroba. How a product is priced in markets outside of the U.S. is a key factor we have to weigh in finding that right fit for out-licensing. Having said that, discussions are underway with a number of organizations right now, and we hope to share exciting updates as things develop on this front. Thank you for being with us today, and I look forward to taking any questions you have once our prepared remarks conclude. I'll now hand the call to our CFO, Ryan Mailling. Please go ahead, Ryan.

Thanks, Craig, and good morning, everyone. As Craig said at the start of today's call, every amount we provide is in U.S. dollars unless we note otherwise. Today, Cipher Pharmaceuticals is reporting results for the company's third quarter and 9-month period ended September 30, 2025. Total net revenue for the 3- and 9-month period ended September 30, 2025, came in at $12.8 million and $38.2 million, respectively. Net revenue for the third quarter of 2025 rose by $2.4 million, or 24%, compared with the same quarter in the prior year. Net revenue for the 9-month period ended September 30, 2025, grew by $16.7 million, or 78%, over the same period in 2024. Those increases were attributable to the addition of the U.S.-based Natroba business on July 29, 2024, for which only 2 months of revenue were included in our prior year results for both the 3- and 9-month periods ended September 30, 2024. Product revenue from the U.S.-based Natroba business, comprised of the brand Natroba and authorized generic Spinosad, was $8.1 million and $22.5 million, respectively, for the 3- and 9-month periods ended September 30, 2025. Product revenue from the U.S.-based Natroba business for the 3 and 9 months ended September 30, 2024, was $5.5 million.

For the third quarter and the nine months that concluded on September 30, 2025, product revenue from our Canadian product portfolio came in at $4 million and $12.7 million, respectively. In the third quarter of 2025, Canadian product portfolio revenue of $4 million rose by $0.2 million, or 5%, versus the $3.8 million recorded in the third quarter of 2024. Product revenue from the Canadian product portfolio for the nine months ended September 30, 2025, was $12.7 million, which marked a rise of $1.9 million, or 18%, compared with $10.8 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 nine months ended September 30, 2025, was affected by movements in the U.S. dollar against the Canadian dollar. For the third quarter, that impact was nominal. Even so, on a constant currency basis for the nine months ended September 30, 2025, Canadian product portfolio revenue grew by $2.2 million, an increase of 21% over the nine months ended September 30, 2024. For the 3 and 9 months ended September 30, 2025, the products making up our Canadian product portfolio gained from a mix of higher sales volumes and favorable shifts in product mix for certain products relative to the same periods in the prior year, and that drove the overall revenue increase.

Now turning to licensing revenue in the U.S. For the 3 and 9 months ended September 30, 2025, total licensing revenue came to $0.8 million and $3 million, respectively. Compared with the same periods a year earlier, licensing revenue fell by $0.3 million and $2.3 million, respectively, for the third quarter and the 9 months ended September 30, 2025. At $0.8 million, overall licensing revenue in the third quarter of 2025 was down 28% from $1.1 million in the equivalent quarter of the prior year. The U.S. Absorica portfolio accounts for this decline; it generated $0.4 million of licensing revenue in the third quarter of 2024, which is $0.2 million lower than the $0.6 million of revenue recorded in the same quarter of the previous year. Lower royalty revenue drove the drop in Absorica portfolio licensing revenue, reflecting reduced sales volumes and net sales achieved by our distribution partner, on which Cipher earns a net sales royalty. In addition, as of January 1, 2025, Cipher no longer earns a royalty on Absorica LD in the U.S. market. We also generated revenue by supplying product to our distribution partner, but in the third quarter that revenue was flat year-over-year.

For the nine months that ended September 30, 2025, licensing revenue overall came in at $3 million, versus $5.3 million in the same stretch a year earlier — that works out to a 44% decline. The drop for the nine months ended September 30, 2025, came from the Absorica portfolio and Lipofen, including its authorized generic. Absorica licensing revenue was $1.7 million for the nine months ended September 30, 2025, down $2 million, or 54%, against the same period in 2024. Absorica revenue for that nine-month span was affected by year-over-year decreases in product shipments on which we generate revenue by supplying product to our distribution partner. The fall in Absorica portfolio licensing revenue for the nine months ended September 30, 2025, was also affected by reduced royalty revenue stemming from lower sales volumes and net sales achieved by our distribution partner, on which Cipher earns a net sales royalty. Lower contractual royalty rates year-over-year added to this as well. Per Symphony Health market data, Absorica's share of the authorized generic of Absorica market stood at 2.9% as of September 30, 2025, a decline of 2.7% from 5.6% at September 30, 2024.

Our products keep encountering rising generic competition along with associated market dynamics here in the U.S. For Lipofen and its authorized generic, licensing revenue came to $1.1 million across the 9 months that ended September 30, 2025 — a drop of $0.4 million versus the same period a year earlier, driven by lower sales volumes and net sales our distribution partner achieved on those products, from which Cipher receives a net sales royalty. SG&A expense for the 3 and 9 months ended September 30, 2025, was $3.7 million and $12.8 million, respectively. Third-quarter 2025 SG&A of $3.7 million was down $2.5 million, or 40%, from the same quarter the year before. That decline came mainly from nonrecurring acquisition-related costs of $1.6 million tied to buying the U.S.-based Natroba business, together with $0.7 million in legal costs concerning an arbitration process, both of which were incurred in the third quarter of 2024. Those costs, however, did not recur in the third quarter of 2025. SG&A expense of $12.8 million for the 9 months ended September 30, 2025, rose by $3.5 million versus the same period a year earlier.

The rise here comes from having a full 9 months of selling, general and administrative expenses tied to the acquired U.S.-based Natroba business in 2025 to date, versus just 2 months of such expenses for that business after the acquisition in the comparable period a year earlier. On top of that, legal costs tied to the arbitration process ran $0.5 million higher across the 9 months ended September 30, 2025, than in the same stretch last year. Partly offsetting these higher selling, general and administrative expenses was $1.9 million in nonrecurring acquisition-related costs connected with buying the U.S.-based Natroba business, booked during the 9 months ended September 30, 2024; those costs, however, did not recur in the comparable period this year. Net income for the 3 months ended September 30, 2025, came in at $5.5 million, or $0.21 per diluted common share, against $0.3 million, or $0.01 per diluted common share, in the same period a year earlier. Last year's net income for the 3 months ended September 30, 2024, took a hit from $1.6 million of nonrecurring acquisition-related costs tied to the Natroba acquisition as well as $0.7 million in legal costs related to the arbitration.

For the 9 months that ended September 30, 2025, net income came in at $14 million, which works out to $0.54 per diluted common share. In the same period a year earlier, that figure was $8.2 million, or $0.33 per diluted common share. The net income for the 9 months ended September 30, 2025 got a boost because the U.S.-based Natroba business was included for all 9 months of the period, whereas in the comparable 9-month stretch of the prior year that business was included for just 2 months following the acquisition. That said, net income in the 9-month period ended September 30, 2025 also took a hit from $0.8 million of noncash fair value adjustments tied to inventory acquired in the Natroba acquisition, and those were recognized in cost of products sold during the period. A $5.8 million increase in net income year-over-year was further helped along by the $1.9 million of nonrecurring acquisition-related costs that were incurred in connection with the Natroba acquisition during the 9 months ended September 30, 2024, since those costs did not recur in the same period this year. Adjusted EBITDA for the 3- and 9-month periods ended September 30, 2025 was $7.3 million and $21.1 million, respectively, versus $4.1 million and $10.7 million, respectively, for the same period ended September 30, 2024.

That works out to a 79% and 97% rise, respectively, for the third quarter and the 9 months ended September 30, 2025, versus the comparable periods a year earlier. Growth in adjusted EBITDA came primarily from having the U.S.-based Natroba business included for the entire period in 2025, partly offset by decreases in U.S. licensing revenue. At the close of the third quarter of 2025, the company held $8.4 million in cash with $13 million of debt outstanding. Cipher keeps producing substantial free cash flow from operations, with $10.8 million in operating cash flow during the third quarter of 2025 and $21 million generated from operations for the 9 months ended September 30, 2025. In the third quarter of 2025, Cipher directed $12 million of its accumulated cash toward repayments on its revolving credit facility and used a further $1.6 million of accumulated cash to repurchase common shares under its normal course issuer bid. After the third quarter of 2025, on October 31, 2025, Cipher directed another portion of the cash it had accumulated from free cash flows toward an additional $5 million repayment on the outstanding balance of its revolving credit facility.

So after that payment, the company’s debt balance is now lower — $8 million outstanding on the revolving credit facility — and with $32 million in total debt repayments completed during the fiscal year-to-date, we’ve made substantial progress toward becoming net debt free. Because Cipher’s credit facility is revolving in nature, following these repayments we still have $82 million of potential financing available to us: $57 million of remaining availability under our revolving credit facility, plus a further $25 million accordion option. Cipher’s continued strong cash flows from operations, together with access to capital, have put Cipher on excellent footing to execute our business strategy and pursue growth opportunities, which Craig highlighted during his remarks. We’ll now open the call for questions.

<<operator_script>> Our first question is from Andre Uddin with Research Capital.

Beyond examining your sales team and direct-to-consumer promotion, could you perhaps talk about whether any potential contracts might exist with the military or with state prisons for Natroba?

That's a really good question. At the moment, we actually have what you might call a strategic pillar focused on government contracting, exactly as you mentioned. As an illustration of something we did recently—though these are only preliminary conversations—I took part just last week in talks with the VA, aimed at broadening the product's reach through the VA and securing access there. That represented, in a sense, our initial move into this space, and after that we intended to expand into additional government agencies. So we are seeing some momentum on that front. Naturally, though, we aren't emphasizing it, since it remains at an early stage—but we are definitely making progress on it.

And Andre, to build on that point, there are additional groups that hold similar interest for us, among them nursing home and retirement associations as well as school nursing associations. The military, clearly, is a segment where we believe demand for this type of product is strong. So we're beginning to restructure our sales force to pursue these more aggressively — what we refer to as pillars of business, where our focus is on associations and groups that let us spread our message far more efficiently and at much better cost efficiency too.

And perhaps, following that same thread, could you talk about how the preferred drug listings for Medicaid are progressing in some of those other states? I know you have Illinois, but is it still moving forward for Natroba?

Yes, that's right. So a portion of this is — part of it is still in progress. As a result, I can't really speak in detail about where those stand. What I can tell you, though, is that right now a number of states comparable in size to Illinois currently have our bid — it's been submitted — to do precisely what you described, namely take permethrin 5% off the preferred listing and make Natroba or Spinosad the preferred choice. So at this moment there are several states holding bids that they are evaluating. The way this works on a rolling basis is that bids come up for renewal each year. Mostly that's the pattern, though a few follow a different rhythm. As we go through this, one thing we're doing is adding both Natroba and Spinosad to state formularies, which guarantees the product gets dispensed and also gives them an option — a financially advantageous one — to have our product as preferred. So states do like having that option, and we're hoping to share some announcements as states reach decisions on those bids.

And I do appreciate the way you're reducing your debt. I was just curious whether you might expand a bit further on in-licensing for your business development pipeline — what does that look like, and where are prices? That's kind of my final question.

When it comes to in-licensing or acquisitions, plenty of opportunities exist. Our focus is really on the ones that align best with the U.S. operations we have today. Right now we're in talks with several different opportunities, or targets. Naturally, as we work through due diligence and the process, some of them drop away, but we've been encouraged lately by certain discussions and meetings involving products we see as fitting well with our U.S. structure.

Our following question is from Max Czmielewski at Stifel.

Justin couldn't be here today, so I'm filling in for him. Still, it's great to hear that you're getting on board with farm to table trends. On that note, I wonder if you could elaborate a bit on how you're approaching the pricing balance. From what I understand, this isn't a pricey product to begin with. So I'd like to hear how you weigh pricing against the volume you expect from the DTC approach, and how you plan to pair that with your digital marketing efforts.

Max, this is Bryan Jacobs. So, your first question is essentially about pricing. What we have consistently observed is that it is tough, when you possess a far better — and by better, I mean more efficacious — product compared with the alternatives, to genuinely want to compete on price. And if I set our business to one side, I believe that is a losing strategy for anybody. When we have the best product, you will command somewhat of a premium price. But on the other side of that, our product is heavily covered on Medicaid and through other — and on commercial plans. So really, what it comes down to is that it is an educational item for a family, because if you think about it, an alternative is that you are frantic, like you may have something such as head lice or scabies. But for head lice, you go to a pharmacy and you try to grab something off the shelf, and you may use it and you run out of it, you may need multiple boxes of that, and it does not work. So, you are battling with head lice for many weeks. So, the cost of that and the cost of the time involved is somewhat of a problem for families.

With our product, after you handle the insurance co-pay and obtain a prescription, your situation wouldn't end up worse, and a single use eliminates every louse and egg, so your child returns to school lice-free the following day. So part of this involves making sure that when someone searches for a product that works, we draw them onto our platform and they say, okay, wow, this is exactly what I want, and then they can actually get it into their hands. That's why we're putting effort into making sure the product is stocked at various retail outlets and offering a delivery choice, so it can arrive at their door. We believe that will be a highly compelling business model. And as you mentioned, that's the stable type approach we're aiming toward. And this comes in addition to our current plan. So we're going to launch this, and we believe it will represent sort of the next phase of growth for the Natroba franchise, and then we'll sort of scale around it from there.