Cipher Pharmaceuticals Inc.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Cipher Pharmaceuticals Inc. Fiscal 2020 Fourth Quarter Results Conference Call. 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. If anyone needs assistance at any time during this call, you may press star followed by the zero on your push-button phone. As a reminder, this conference is being recorded today, Friday, March 19, 2021. 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 under-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 on 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.

Hi, everybody. This is Rizwan Chaudhry, and you are listening to the Field Finish podcast, sponsored by Abijek, the show that shares expertise in all aspects of injectables, vaccines, and aseptic field finish. Season one is offering 10 episodes focused on topics including facility design, regulatory, quality, supply chain management, and ARVR, to name just a few. And today I'm delighted to be joined by Parish Gallagher, an independent bioprocess consultant, and we are going to be talking about the current state and trends impacting field finish from formulation through to commercialization. So Parish, first of all, it's lovely to meet you. How are you? Very well, thank you. Well, Parish, before we start talking about the impact of field finish on the trends, would you mind giving the listeners a quick overview of your role and your business?

So I've been in bioprocessing for over 40 years in four different drug companies. I helped bring two drugs to market, built a number of stainless steel facilities and single-use facilities. And I started my own company 20 years ago in single-use manufacturing and sold that to GE Healthcare a couple of years ago. Right now, I'm an independent bioprocess consultant.

Fantastic. So my first question for you is, what are the different types of fill finish technologies available right now?

So there are a number of them. The traditional fill finish technology is an open vial process where vials are filled in the open in a class 100 clean room suite with operators standing in that suite servicing the production line as it operates. Another approach is to put all of that production line in an isolator and use robotic machines to do the filling and the maintenance and the stoppering and capping of the vials after they are filled. So those are the two main filling approaches today.

Right. And what are the capital costs of those different technologies? Is it very different?

Yeah, it is very different. The open vial filling is the highest capital cost process. because of the expense of the clean room facility and the operational expense to maintain that clean air. And the machinery that does the filling and the processing of the conveyors and processing the vials is very capital intensive. By comparison, the robotic approach of a closed clean room with robots is quite a bit less expensive, and it does not require being placed in a very clean space. So that reduces the capital cost of the facility in which it sits.

Right. So what are the main strengths and weaknesses of the different technologies?

So the open filling technology's weaknesses are that the vial is exposed to the environment. So that can jeopardize the quality of the product if it's infected with a dust particle containing bacteria or fungi. That's the main objection against open vial fillings. The other weakness, of course, is the validation is very expensive on top of the capital cost because you've got to validate a very clean environment and demonstrate that it does not contaminate the vials that are being processed.

Right. And what are the strengths for it, though?

Well, the strengths are that you can do very large scale fills with open vial filling. So open vial filling facilities can do tens of thousands to 100,000 vials a day because of the high throughput machinery. And that, of course, is very good for reducing cost of goods and supplying big markets.

And with regards to the robotic use of technology, what are the strengths and weaknesses to that?

So the weaknesses are it's not as large scale. So the robots cannot work as quickly as you can operate an open vial filling line. The robots move methodically within the chamber and do the vial placements and the vial filling. and the vial stoppering and capping. So those machines are limited in their speed. The other weakness, of course, is that you need to clean and place the entire chamber. So that's an expensive, time-consuming step. The strengths of the closed chamber approach is that you have a much cleaner environment because there are no humans standing in the environment. And so the chances of contaminating the vial are nearly eliminated. And that, of course, increases the assurance of safety in doing the filling process.

Now, you touched on it a little bit earlier in your previous answer, but how do the cost of goods compare across the different technologies?

Well, the cost of goods are lowest for open vial filling because you can do such large fills. So you're amortizing all of the overhead costs over many more vials of drug, despite the fact that you have a high capital cost, which, of course, turns into a high depreciation cost. So usually open vial filling has a lower operational cost compared to closed chamber filling, which is a smaller system, has fewer vials per fill. Therefore, the overhead costs are amortized over fewer vials, which drives up the cost per vial.

And now let's talk about validation. How do the validation burdens compare across the different technologies?

So the validation of the open vial filling focuses on the validation of the clean air system that's maintaining the environment over the production line, since that's critical to ensuring that the vials do not get contaminated. So that validation has to be done in both static and dynamic conditions to demonstrate the robustness of the HVAC filtration system in the production room. The validation of the closed chamber system includes environmental monitoring to show that the clean in place and sterilization in place of the chamber itself is effective and thorough and will ensure a clean environment for the filling operation of the vials. So the focus there is on cleaning and sterilization validation compared to the open vial filling line.

So in terms of the facilities themselves, what are the actual differences in regards to the facilities across the different technologies?

So in the open filling line process, the facility is dominated by HVAC systems to provide all of the clean air, providing class 100 air over a large area. And you're fighting the contamination brought in by humans into that space. So the facility systems and utility systems in an open filling vial facility are more extensive and more expensive as a result. and cost more to maintain. The facility in the closed chamber process is much simpler and it does not have to be any cleaner than class D because the chamber itself is operating at a class one level of purity. So that reduces the capital costs very significantly. And it allows you to put a second or third or fifth or 10th chamber in that same facility. And that way you can amortize the cost of operations over many more filling chambers. That reduces the capital cost of the facility amortized over many more filling operations.

So Parish, that's fantastic. So what do you see as the future for fill finish?

Well, the really exciting future is the ability to fill the vial when it's closed. So in other words, the vials are already stoppered and they're sterilized and they're filled by injecting the drug through the stopper and backfilling the vial. and then withdrawing the needle and sealing the hole in the stopper. And this has been commercialized by a company called Aseptic Technologies. They're located in Belgium. Another company that's taken that technology to the next step is Intact Technologies. They're located in Connecticut. And with regard to them, the FDA has reviewed their technologies. they've licensed them to do vial filling and also to do compounding of solutions in bags using this same stopper that's pierced by the filling needle and backfilled. So that future looks very strong and very interesting. And of course, by having a closed stopper, you've relieved a lot of the validation around maintaining clean air over the open vial process. So there's a great savings there.

Brilliant. Well, thank you very much for talking to me today, Parrish. Now, if you want to know more about what you do and your solutions, how can they get hold of you?

My email address is xlrxone.

at aol.com brilliant there you go listeners if you'd like to know more then you can get in touch with parish using that email address and if you'd like to listen to more podcasts around phil finish and related topics then please check out the phil finish podcast website which is www.philfinishpodcast.com where you can hear other podcasts as well as put down any topics that you'd like to hear more about as well and hopefully you can see that in future editions of the series so all that's left me to say is thank you parish for your time today thank you listeners it's been great to have you here and until next time goodbye

And now a brief word from this episode's sponsor. AppEject is helping companies fill finish their injectable medicines and vaccines in scalable pre-filled delivery devices using blow, fill, seal, aseptic technology. To learn more or explore how AppEject can help your company solve its injectable drug delivery challenges, visit www.appeject.com. Copyright AppEject. All rights reserved. The views, thoughts, and opinions expressed in the podcast belong solely to the speaker and do not necessarily reflect the views, thoughts, and opinions of the host, sponsor, speaker's employer, or any other organization or individual mentioned.

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I would now like to turn the call over to Mr. Craig Mull, Interim Chief Executive Officer of the company. Please go ahead, Mr. Mull.

Thank you, Operator, and good morning, everyone. Joining me today is Scott Langell, CIFRS CFO. On today's call, I will make opening remarks before passing the call over to Scott to review the financial results in detail. Following our prepared remarks, we will open the call for your questions. Note that all numbers are in US dollars unless otherwise stated. Fiscal 2020 results showed stable revenue and strong cost control, which translated into a 8.6% improvement in adjusted EBITDA and a 60% increase in earnings per common share. In 2020, we were laser focused on executing against our priorities, including reducing our cost structure, utilizing cash flow to pay off our credit line, establishing the right partnerships to drive growth, and implementing a mechanism to allow us to buy back our stock at what we believe are attractive prices. COVID limited access to doctors' offices during the year, which caused us to delay some of our partnership plans. But subsequent to year end, Cypher entered into a promotional agreement with Verity Pharmaceuticals for marketing, sales, and co-promotion of Brennaves, Agristat, and Treviant. Under the terms of the agreement, Verity will be responsible for the co-promotion of all hospital products inclusive of all costs and expenses associated with these products. Verity will be compensated by receiving a tiered percentage of net margin of the products. We are pleased to have finalized our agreement with Verity as we continue growing the hospital business and providing industry leading products. We believe Verity Salesforce will help to manage our cost efficiencies and drive growth and profitability within our hospital business. As I previously mentioned, earnings increased 60% in 2020 to $0.16 per share and $0.10 per share in the prior year. Net income and earnings per share were both impacted by a $5.3 million non-cash impairment of intangible assets related to the arbitration process with bausch although we are disappointed with the results of this arbitration it is important to note that trans was not currently being marketed or generating revenue for cipher excluding this non-cash impairment charge eps for the year would have come in at 30 cents 36 cents per eps and EPS for the quarter would have been 19 cents. In addition to our strong earnings from continuing operations, the company generated $11.7 million in cash from operating activities, which allowed us to pay the last installment of $1.7 million towards the balance of our credit facilities, concluding our obligation on the credit facilities with our Canadian lender and leaving the company debt-free. In August, Cypher announced that it had filed and the Toronto Stock Exchange accepted a notice of intention to make a normal course issuer bid. In 2020, Cypher repurchased 103,500 shares at an average cost or price of $1 for cancellation. And we intend to apply for an authorized repurchase program which would allow us more flexibility to buy back stock during self-imposed blackout periods.

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With our pristine balance sheet, Cypher is now in an excellent position to continue to execute the normal course issuer bid. and to selectively pursue product and business acquisitions in a prudent manner with a focus on high growth potential and near-term profitability. One avenue for growth continues to be with our development partner, Gallifar. There are a number of interesting projects we are evaluating, including key products in the Lucy portfolio. One product of interest is a drug for severe hand eczema for the US and Canadian markets. Cypher and Gallifrey are working closely and expect to receive feedback from the FDA on our clinical protocol submissions. Cypher continues to evaluate the market potential for this product. In our tattoo program, the US Patent Office issued a notice of allowance for the US patent application covering tattooed dermal compositions. We have received encouraging results from the proof of concept studies and identified a lead candidate compound. Planning is currently underway for the next focused animal study that will incorporate test parameters that will potentially broaden and reinforce the existing IP portfolio. Our development partner, Moberg, has developed a proprietary formulation that can deliver a higher concentration of active drug to the nail than competing products on the market. To date, Moberg has conducted two North American Phase III studies. In these studies, the overall cure rates were lower than competing products at 4.5%. However, in contrast to the competing products, the mycological cure rate was 50% in less than 24 weeks, while the competing product required longer to reach this rate. Moberg is considering conducting additional trials to address the complete cure rate by shortening the treatment period. From a financial perspective, fourth quarter results were encouraging. We are pleased to share that EPIRUS continued to perform well in the quarter, with revenue at $2.1 million compared to $2 million in the comparative period. EPIRUS finished the quarter with a 40% market share in the Canadian market. up from 39% in the comparative period. We are extremely pleased with the performance of Appiris and the stability of revenue and cash flow during these challenging times. Licensing revenue from Absaroka was $3 million in the fourth quarter, down from $3.1 million in the same period last year. Absaroka's market share for the year ended December 31, 2020, was approximately 5.5%, compared to 7% for the year ended December 31, 2019. Overall, Absaroka's business, brand, and L&D remain steady over the year at 7% market share. Cypher has assembled an attractive portfolio of assets beyond our currently marketed products, and we will continue to selectively look for additional products and businesses with growth potential while remaining focused on profitability. I will now turn the call over to Scott for a financial review of our third quarter results.

Thanks, Craig. Revenue in the fourth quarter was $6.1 million compared to $5.9 million for the comparative period. Licensing revenue increased by 3% to $3.9 million for the quarter compared to $3.8 million for the same period last year. Licensing revenue for Mazorca in the U.S. was $3 million for the three months ended December 31st, 2020, a decrease of 0.1 million or 3% compared to 3.1 million in Q4 2019. Licensing revenue from LipoFen and the authorized generic version of LipoFen was 0.8 million for Q4 2020, an increase of 0.2 million compared to revenue of 0.6 million for Q4 2019. Licensing revenue for the extended release tramadol, CONZIP, and durella was $0.1 million, which remained relatively unchanged for the compared period. Product revenue increased by $0.1 million or 5% to $2.3 million for Q4 2020, compared to $2.2 million for the comparable period in 2019. The increase in product revenue was attributable to Atheris in respect of which revenue increased to 2.1 million compared to 2 million for the comparative period. According to Acuvia, Paris had a prescription market share of 40% in Canada for the three months ended December 2020, December 31st, 2020, compared to 39% for the three months ended December 31st, 2019. Product revenue for OSINEC, Ozonex, Betaflam, Dickrell, RenovAce, Agristat, and Vanica was $0.3 million in the aggregate compared to $0.2 million for the compared period. Total operating expenses were $8 million for Q4 2020 compared to $2.2 million for Q4 2019. The increase was primarily driven by the non-cash impairment of intangible assets related to Trulance of $5.3 million. Loss from continuing operations was 0.1 million or a loss of 0 cents per basic and diluted share in Q4 2020 compared to income from continuing operations of 2.6 million or 10 cents per basic and diluted share in Q4 2019. Income from continuing operations was impacted by the impairment of intangible assets of 5.3 million. Adjusted EBITDA for Q4 2020 was 3.9 million compared to $4.2 million in Q4 2019. The company had $9.1 million in cash and no debt at December 31, 2020. The company generated $11.7 million in cash from operating activities for the year ended December 31, 2020, and used approximately $8.9 million in cash during the year, which included $7.7 million in principal repayments. Cypher has purchased for cancellation 103,500 common shares during the fiscal year, and while our strengthened balance sheet, we are in an excellent position to continue to execute on our NCIB while selectively looking at attractive product acquisitions. I will now turn the call back to Craig for closing remarks.

Cypher's business and operations have demonstrated resilience as the COVID-19 pandemic continues to impact the world. With a profitable business and a reduced cost structure, we feel that we are in an excellent position to start accelerating our strategic promotional efforts to drive market share in our core brands and explore attractive product and business acquisitions in a prudent manner. We'll now open up the call for questions. Operator?

Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press the star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. If you are using the speakerphone, please lift the handset before pressing any keys. If you do have a question, please press star one now. First question comes from Doug Lowe at Lee Jones Gable. Please go ahead.

Yeah, thanks very much and good morning Frank. As always, I just want to start with an Absorca question if you don't mind. It's kind of reflecting on the fact that the purest market share in Canada is exceedingly strong and continues to grow while Absorca market share in the U.S. was strong and continues to shrink. strong. Just wonder if you or Sun have contemplated whether a more Apuris-like pricing strategy in the U.S. might be a way to capture Apuris-like market share there, and if that might be a strategy that you could be contemplating, particularly when genericization of the product could very well be on the horizon.

We've had many conversations with Sun about the Absaroka strategy, and I They feel, as we do, that a reduction in price would not necessarily increase the volume of the product. The product is known as a premium product. And if you start reducing the price, that image of premium could also disappear. So it's something that we're looking at, Doug, constantly. But at this point in time, we believe a price reduction would not necessarily yield increased volume.

Okay, no, that makes sense. And then I haven't been in front of a Bloomberg terminal for a while, three guesses why. So I don't have the numbers on Absorca versus Absorca LD in the quarter. Is that a split that you'd be prepared to share?

The Absorca LD was launched, I think it was November of 20, what year, what month was it launched in? February, sorry, February. And it You know, due to COVID and perhaps other issues, it hasn't gained the market share that was expected. It is growing. It represents about a 25% share of the Absaroka market at this point. Go ahead, Doug.

Oh, no, I was just acknowledging the number. That's fine.

So it hasn't really gained as expected.

Okay, that's fine as well. And then thirdly, I noticed in your MD&A that you indicated that you are going to undertake post-marketing studies on BritaVest, you know, now as part of the Verity portfolio. Just thought that was an interesting observation. Just wondered what sort of market analysis or intel that you have about BritaVest's potential adoption in Canada, you know, upon considering its negative regulatory history in the U.S. And I'll leave it there. Thank you.

We believe that the product is, you know, a strong candidate for the hospital sector. We believe that Verity, who has a background with these products through Cardione, will do a good job of increasing the number of, you know, hospitals that we have on our roster, and we'll have feet on the ground, and they'll be promoting those products, particularly BrennaVest. That's great. Thanks, Greg. Thanks, Doug.

Thank you. Ladies and gentlemen, as a reminder, if you have any questions, please press star 1. There are no further questions.

I will now turn the call back over to Craig Mull for closing comments.

Thank you, Operator. Thank you for joining us today. We look forward to reporting on our progress throughout the balance of 2021 as we execute on the priorities discussed today. Thank you.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and we ask that you please disconnect your minds. Enjoy the rest of your day.