Cipher Pharmaceuticals Inc. (CPH) Earnings Call Transcript

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Cipher Pharmaceuticals quarterly conference call for the company's second quarter 2026 financial results. [Operator Instructions] As a reminder, this conference is being recorded today, Wednesday, August 12, 2026. 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. Such statements speak only as of the date made. Now I would like to turn the call over to Mr. Craig Mull, Interim Chief Executive Officer of the company. Please go ahead, Mr. Mull.

Good morning, everyone, and thank you for joining us today. Before I begin, I would like to remind everyone that all figures discussed on today's call are expressed in U.S. dollars, unless otherwise specified. Cipher's second quarter of 2026 continues to represent a highly profitable specialty pharma platform company that delivers strong shareholder returns. Cipher's combined business led by Natroba in the U.S., and Epuris in Canada, is robust and continues to generate strong cash flows for our shareholders. In the quarter, the U.S.-based Natroba business experienced pressure with respect to sales volumes. However, in other aspects of the product portfolio, such as the Canadian product portfolio, we experienced growth and market share gains. Looking ahead, we believe the Canadian portfolio will continue its growth, whereby we announced a positive development related to public reimbursement coverage for Epuris, with the signing of a letter of intent between Cipher and the pan-Canadian Pharmaceutical Alliance, which is expected to expand patient access to Epuris, with the product's inclusion on additional federal, provincial, and territory public drug plans. Revenue from Natroba for the second quarter of 2026 was $6.3 million compared to $7.8 million for the same quarter in the prior year, impacted by reduced sales volumes to state Medicare programs. Looking ahead, we are investing in and building new business verticals to expand the U.S. business to grow commercial payer volumes, which include, first, implementing strategies to grow volumes in our direct-to-patient platform recently launched earlier this year. Given the acute nature of Natroba's indication to treat head lice and scabies, we believe the product is consumer-focused and more susceptible to sales growth in this vertical, arguably more so than other pharmaceutical medications. Second, making the product easier to get to patients either through direct mail or same-day delivery partners we have established and put in place. Third, investing in programs with large retailers to have Natroba and/or Spinosad on the shelf in large retailer settings, such as most recently launched the program to have the product available at Walmart, which represents an area we see it as a tremendous opportunity for growth in the future. Epuris has demonstrated growth during the quarter, with revenue from Epuris of $4.1 million for the second quarter in 2026, an increase of $0.5 million or 14% compared to $3.6 million in the second quarter of 2025. During the second quarter of 2026, sales volumes increased 8% compared to the same year -- same period in prior year, and market share for Epuris grew by 1.3% in the first half of 2026, to 47.1% market share as of June 30, 2026, according to IQVIA market data. Epuris continues to expand its position as the market-leading isotretinoin product in Canada. We are also optimistic that recent developments surrounding the letter of intent signed with the pCPA, establishing a path for expanded public drug plan coverage across Canada will provide growth for Epuris. Following the execution of the letter of intent with the pCPA, we have been actively collaborating with federal, provincial, and territorial drug plans to finalize product listing agreements, which we expect to be finalized over the next 30 to 60 days. Listing on these additional public drug plans provides wider access for Epuris for patients who are not covered elsewhere and accordingly, expand Cipher's addressable market for the product, as there is a subset of patients that Epuris can now reach since they did not previously have coverage for the product. We expect our market share to grow meaningfully in time, particularly in certain key markets, whereby a high proportion of their patient population has drug coverage through the public funded drug plans as opposed to private insurance plans. The public drug plan coverage is something we have been pursuing in key markets with limited success for some time. Therefore, the signing of the letter of intent with the pCPA is an exciting achievement for Cipher and Epuris, and truly beneficial to the Canadian patient population navigating severe nodular acne. While Cipher's total adjusted EBITDA for the second quarter of 2026 was ultimately reduced compared to the prior year and the most recent quarter, we have maintained our overall profitability with adjusted EBITDA margins of 57% calculated as adjusted EBITDA divided by revenue. Adjusted EBITDA margins for the second quarter of 2026 were consistent with the second quarter of 2025. Adjusted EBITDA margins for the -- for year-to-date June 30, 2026, remained elevated at 59% compared to 54% for the same period in the prior year. Our CFO, Ryan Mailling, will provide a detailed overview of our financial results following my commentary. For the remainder of my commentary, I would like to provide an update on our business development activities, which are -- which are a key area of focus for Cipher, and we continue to be very active in this area during the second quarter of 2026. Myself and along with several members of our team are continuing to focus on a significant amount of our time on these activities. We have three distinct strategies aside from our existing business, we are pursuing to drive future shareholder value and growth in our business. Firstly, acquisition or in-licensing of complementary products. Secondly, out-licensing of Epuris and Natroba to markets outside of North America. And lastly, company acquisitions that are of strategic value to Cipher. The first area of growth strategy is the pursuit of acquiring or in-licensing complementary products, which can be directly commercialized through our existing Canadian and U.S. commercial infrastructures. We are currently active in discussions with various parties and continue to source and explore further opportunities. Although we continue to pursue these opportunities, similar to other areas of business development, these activities do take time. The time horizons on each opportunity vary and the opportunities may or may not come to realization in the end. Second strategy we have undertaken is pursuing out-licensing opportunities for both Natroba and Epuris outside of North America. We have made progress in this area during and subsequent to the second quarter, particularly in pursuing opportunities to out-license Epuris to territories outside of North America. We have been -- we have seen interest from a number of parties in exploring a partnership distributing Epuris under license in their respective territories, and we are actively in discussions with these parties and evaluating the potential opportunities for the products in these territories. Given Epuris is the leading isotretinoin product in the Canadian market, we believe Epuris could also perform strongly in other territories with similar markets to Canada, and represents a further avenue of growth for Cipher. Similarly, with respect to Natroba, we continue to believe there is a high unmet need for a highly effective product like Natroba to address head lice and scabies indications in other territories. However, product pricing in territories outside of the U.S. varies considerably from the U.S. market and therefore, the execution of this strategy is taking time as we believe it is important to find the right markets and out-licensing partners for Natroba to ensure commercial success of the product in territories outside of North America. The third area of strategy for growing the business is evaluating and pursuing company acquisitions, which may have strategic value for Cipher. As we have said previously, we continue to believe that Cipher would benefit from additional size and scale, both in its pursuit of the other business development strategies I mentioned, as well as its ongoing and future operations. Accordingly, acquiring companies that could add to our size and scale, as well as provides other strategic benefits continues to be an area we are placing a great deal of focus. During the second quarter, we were in advanced stages of a process for an acquisition target. However, ultimately -- we ultimately determined that not continuing with the process was the right decision at this time. Cipher -- and therefore, the deal did not materialize. We are currently assessing other opportunities and also continue to actively source, evaluate, and pursue potential acquisitions that achieve our objectives. We remain optimistic that we will achieve success in finding and executing on the right opportunity. I will now pass the call over to our CFO, Ryan Mailling. Please go ahead, Ryan.

Thanks, Craig, and good morning, everyone. As Craig mentioned at the beginning of today's call, all amounts provided are expressed in U.S. dollars, unless otherwise noted. Today, Cipher Pharmaceuticals is reporting results from the company's second quarter and year-to-date 2026, the 3 and 6 months period ended June 30, 2026. Total net revenue for the 3 and 6 months ended June 30, 2026, was $12.1 million and $24.6 million, respectively. Net revenue for the second quarter of 2026 decreased by $1.3 million or 10% compared to the same quarter in 2025. Net revenue for the 6 months ended June 30, 2026, decreased by $0.8 million or 3% compared to the same period in 2025. Revenue was impacted for both second quarter and year-to-date 2026, by lower revenue from Natroba, however was partially offset by revenue growth from Epuris. Additionally, for the second quarter of 2026, due to reduced product shipments to Cipher's distribution partners, which are subject to variability from period to period, licensing revenue also contributed to the reduction in total net revenue during the quarter. Although Natroba experienced sales volume pressure contributing to lower revenue during the second quarter of 2026, this was primarily the result of evolving market dynamics with respect to Medicaid programs. Our expectations for the product have not changed despite market dynamics that may emerge over time. We expect performance of the product to improve in future quarters as the implementation of our strategy related to Natroba and its authorized generic Spinosad takes effect, including an expanded focus on commercial channels, which Craig discussed in his remarks. The overall business continued to remain highly profitable despite a slight decline in margins for the second quarter of 2026. On a year-to-date basis, margins for the ongoing business remained consistent when compared to the same period in 2025. Gross margin for the second quarter of 2026 was 80%, a decrease of 1% from 81% in the second quarter of 2025. Gross margin during the quarter was impacted by reduced licensing revenue as well as lower revenue from Natroba compared to the 3 months ended June 30, 2025. On a year-to-date basis, gross margin increased by 2% to 81% for the 6 months ended June 30, 2026, compared to 79% for the 6 months ended June 30, 2025. The increase in gross margin for the year-to-date is largely due to the nonrecurring fair value adjustments to acquired inventory included in the cost of sales for the 6 months ended June 30, 2025, in connection with the company's acquisition of the U.S.-based Natroba business. Excluding the impact of these fair value adjustments in the prior year, Cipher's gross margins remained consistent year-over-year at 81%. We've also maintained our approach of continuously monitoring and evaluating our cost base. As a result of this approach, we have seen a reduction in our selling, general and administrative expenses for both the 3 and 6 months ended June 30, 2026. Selling, general and administrative expenses for the second quarter of 2026 were $3.4 million compared to $4.1 million during the same quarter in the prior year, representing a 16% reduction. For the 6 months ended June 30, 2026, selling, general and administrative expenses decreased by 30% to $6.3 million from $9 million during the same period in the prior year. There were two main components contributing to the reduction in our selling, general and administrative expenses. One, nonrecurring costs; and secondly, operational efficiencies. In the prior year, during the 3 and 6 months ended June 30, 2025, we incurred non-recurring legal costs associated with the arbitration proceedings relating to defending the company's intellectual property, which were concluded in Cipher's favor. These costs amounted to $200,000 for the second quarter of 2025, and $1.2 million for the 6 months ended June 30, 2025. Costs related to this matter were negligible in the current year. There were also $0.1 million of restructuring-related costs incurred in the prior year during the 6 months ended June 30, 2025. In the current year, however, there were certain non-recurring costs incurred related to professional services fees and other due diligence activities in connection with the advanced stages of pursuing an acquisition opportunity, as Craig mentioned in his remarks. We incurred $0.3 million in costs for these activities during the second quarter and year-to-date 2026. When removing these nonrecurring costs, selling, general and administrative expenses on a normalized basis have declined $0.8 million for the second quarter and $1.7 million for the 6 months ended June 30 compared to the same period in prior year. This remaining decrease is primarily driven by operational efficiencies gained within the U.S. business, including savings and employment-related costs from a rationalized employee complement and reduced selling and marketing costs. Net income for the 3 months ended June 30, 2026, was $4 million or $0.15 per diluted common share compared to $5.9 million or $0.22 per diluted common share for the same period in prior year. The decrease in net income for the second quarter of 2026 was attributable to reduced gross profit arising from the impacts on revenue described previously, combined with an unrealized foreign exchange loss from the effects of the U.S. dollar's appreciation relative to the Canadian dollar on the translation of certain net assets of the company denominated in Canadian dollars. Net income for the 6 months ended June 30, 2026, was $10.2 million or $0.39 per diluted common share compared to $8.5 million or $0.32 per diluted common share for the same period in the prior year. This increase in net income for the 6 months ended June 30, 2026, was contributed to by nonrecurring costs incurred during the 6 months ended June 30, 2025, totaling $2.1 million, including legal costs related to the arbitration, restructuring-related costs, and fair value adjustments to acquired inventory. The reduced cost structure as a result of these non-recurring costs in the prior year was partially offset by lower gross profit during the 6 months ended June 30, 2026. Adjusted EBITDA for the second quarter of 2026 was $6.8 million compared to $7.6 million for the second quarter of 2025, representing a decrease of $0.8 million or 10%. The decrease in adjusted EBITDA was largely contributed to by the lower gross profit. However, this was partially offset by reductions in SG&A expenses, mainly driven by the efficiencies in our cost structure. Adjusted EBITDA for the 6 months ended June 30, 2026, was $4.6 million (sic) [ $14.6 million ] compared to $13.8 million for the 6 months ended June 30, 2025. This represents an increase of $0.8 million or 6%. Increase in adjusted EBITDA was primarily attributable to those reductions in selling, general and administrative expenses, which I previously mentioned. Despite facing pressure on our top line during the second quarter of 2026, Cipher continues to be highly profitable, cash generative, and remains debt-free. Cipher ended the quarter with $9.1 million in cash and generated cash flow from operations of $7.6 million during the first half of 2026. Additionally, having fully repaid the outstanding balance on our revolving credit facility as of the end of the first quarter of 2026, we retained availability to $90 million of potential financing comprised of $65 million revolving credit facility, plus a $25 million accordion. This potential financing, combined with positive operating cash flows position us well to continue investing in our growth strategy, which Craig had outlined in detail during his commentary.

Thanks, Ryan. Before we open the call for questions, I wanted to reiterate and leave you with a few key items from our commentary. First, Cipher remains highly profitable with gross margins of 81% and EBITDA margins of 59% on a year-to-date basis. Second, our expectations for the U.S. business have not changed. Despite impacts from market dynamics, which may arise over time, we expect performance to improve in future quarters as the programs we are implementing related to Natroba take effect. Third, expanded public reimbursement for Epuris is expected to drive market share growth, especially in key markets, with the additional public drug plan listing enhancing patient access to the product, which already had the position as the market-leading isotretinoin in Canada, prior to the expanded coverage. And finally, we continue to remain highly active in the area of business development, including opportunities for in-licensing of products, acquisition of products or companies, and out-license of our existing portfolio. We view these activities as a key growth driver for Cipher. We will now open the call for questions. At this point, I will ask our operator to provide instructions for the questions-and-answer session. Operator, please go ahead.

[Operator Instructions] Your first question comes from the line of Max of Stifel.

On for Justin this morning. A couple of questions. Firstly, just curious on sort of the Natroba dynamics. Can you characterize what exactly is kind of impacting the sales channel with respect to Medicaid, and sort of how many patients -- would be publicly covered patients -- are falling off maybe due to recent regulation or legislation at the federal level? And kind of how you expect to mitigate this via one, through your stocking program; and two, any traction in the DTC?

Thanks for the question, Max. Bryan, would you like to address Max's question?

Max, it's Bryan Jacobs. As you know, I'm the President of the U.S. business. The question on Medicaid, answering what's happening in the overall Medicaid plans and covered lives is a little bit kind of beyond what we can talk about that's widely covered in the news. But what we can say and what that impacts us is one of the strengths of the business is that we've always had very strong Medicaid coverage in the U.S. business, and that will continue to be a strength going forward, whether there's an increase or what we're seeing is a decrease in covered lives in Medicaid. So the business will have to ebb and flow on that. But really then to answer the question of, well, what are we kind of doing about it, because we can't cover legislative -- we can't control legislative changes to Medicaid. We can only control what we want to do in making sure that the Natroba business continues to grow. We didn't start that just yesterday. We've been looking at that and expanding it over the course of the last year. It took a tremendous amount of time to get a first-in-class direct-to-patient model. We don't just have a telescript type service bolt on to our website. We have a first-in-class design so that you can get a script within an hour and you can schedule delivery or have a script routed to your nearest pharmacy instantly, so that you can pick it up. That -- we've been working on that for the better part of the year ahead of this quarter. In addition to that, we've had discussions with very large retail pharmacies, like the one that we've talked about here. And those conversations have been going on for the better part of the year. And we're happy to announce that we closed one of them to make Natroba and Spinosad available at every single Walmart across the U.S. So those are both initiatives to focus on commercial growth, so that we're not just ebb and flowing with changes in Medicaid that occur.