Small-Cap Research January 22, 2014 Jason Napodano, CFA 312-265-9421 jnapodano@zacks.com scr.zacks.com 111 North Canal Street, Chicago, IL 60606 (DND-TSX) DND: Insights From Meeting With Management Current Recommendation Buy Prior Recommendation Date of Last Change 01/03/2012 Current Price (01/22/14) $7.10 Target Price $11.00 UPDATE On Sunday, January 12, 2014, we arrived in San Francisco, CA for the annual JP Morgan Healthcare Conference, as well as the parallel Biotech showcase and OneMedForum Conferences. This was the eighth year in a row that we made the trip to San Francisco for these events, which are a must-attend for serious healthcare investors. During my three days in San Francisco, I conducted 25 one-on-one meetings with various managements of small and mid-cap biotechnology and specialty pharmaceutical companies. Below are some notes from our meeting with SUMMARY DATA 52-Week High 9.59 52-Week Low 1.81 One-Year Return (%) 333.7 Beta 1.22 Average Daily Volume (sh) 161.5 Shares Outstanding (mil) 24.6 Market Capitalization ($mil) 192.2 Short Interest Ratio (days) 1.6 Institutional Ownership (%) Insider Ownership (%) Annual Cash Dividend $0.00 Dividend Yield (%) 0.00 5-Yr. Historical Growth Rates Sales (%) Earnings Per Share (%) Dividend (%) P/E using TTM EPS P/E using 2013 Estimate 16.4 P/E using 2014 Estimate 10.3 Risk Level Type of Stock Industry ZACKS ESTIMATES Average, Small-Value Med-Biomed/Gene Revenue (millions of CAD) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2012 1.8 A 1.6 A 2.1 A 2.9 A 8.5 A 2013 3.3 A 5.5 A 5.6 A 11.4 E 20.9 E 2014 32.3 E 2015 37.8 E Earnings per Share (EPS is operating earnings) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2012 $0.01 A $0.01 A $0.03 A $0.05 A $0.10 A 2013 $0.06 A $0.12 A $0.14 A $0.36 E $0.69 E 2014 $0.76 E 2015 $0.89 E
WHAT S NEW Cipher Pharmaceuticals (CPHMF) Meeting with Larry Andrews, CEO, and Norm Evans, CFO We had another good meeting with Cipher Pharmaceuticals. Cipher shares are up 142% over the past twelve months, but down 21% from the highs in September 2013. The high in the stock was put in on September 16 th, three days before U.S. distribution partner for Absorica, Ranbaxy Labs, announced it had received a Paragraph IV certification from Watson Labs for a generic Absorica. We wrote previously on this subject, noting that the panic that ensued after the announcement created a unique buying opportunity in the shares because the mostly likely outcome from Watson s abbreviated new drug application has no material impact on our price target. In fact, we believe that Cipher and Ranbaxy, having recently filed an injunction lawsuit back against Actavis plc, the parent corporation of Watson, will keep Absorica exclusive until 2020 or 2021. Absorica prescriptions took a bit of a breather in November 2013 (see below). We don t know why, although we have heard that they bounced back strong in December 2013. Perhaps it was because October 2013 was extraordinarily strong. Regardless, the overall trend with Absorica looks fantastic and we believe Cipher could be collecting up to $30 million in royalties from Ranbaxy by 2016. In Canada, Cipher recently launched Epuris, an identical product to Absorica, with six full-time and one part-time sales reps. We think Epuris has $6 to $8 million sales potential in Canada. We anticipate Cipher filing the Canadian new drug submission for Betesil Patch during the second half of 2014. Ultimately, Cipher will look to expand its product offerings in Canada through product in-licensing or acquisitions. We believe Cipher exited 2013 with roughly $23.5 million in cash. The company should generate around $4.0 million in cash during the first quarter 2014, and recently netted a $5.0 million sales milestone from Ranbaxy in January 2014. This puts cash at the end of March 31, 2014 projected to be north of $31.0 million. With a clean balance sheet, that leaves plenty of room for future deals. Management continues to execute well and we believe the stock remains attractively valued. Zacks Investment Research Page 2 scr.zacks.com
PROJECTED FINANCIALS Income Statement Model in Canadian Dollars (IFRS) 2011 A 2012 A Q1 A Q2 A Q3 A Q4 E 2013 E 2014 E 2015 E 2016 E Lipofen Net Revenues $2.2 $4.6 $0.8 $0.8 $0.6 $0.7 $2.9 $2.5 $2.0 $1.0 CIP-Fenofibrate YOY Growth -56.0% 109.1% - - - - -37.0% -13.8% -20.0% -50.0% ConZip / Durela Net Revenues $0.8 $1.4 $0.5 $0.5 $0.5 $0.6 $2.1 $5.0 $6.0 $8.5 CIP Tramadol-ER YOY Growth - 75.0% - - - - 50.0% 138.1% 20.0% 41.7% Absorica Net Revenues $0.6 $2.6 $2.0 $4.2 $4.5 $10.1 $15.8 $22.8 $25.8 $27.0 CIP-Isotretinoin YOY Growth 50.0% 333.3% - - - - 507.7% 44.0% 13.4% 4.7% Product Sales (Canadian) $0 $0 $0 $0.1 $0.0 $0.1 $0.2 $2.0 $4.0 $6.0 CIP-Isotretinoin YOY Growth - - - - - - - - 100.0% 50.0% Total Revenues $3.569 $8.458 $3.293 $5.547 $5.636 $11.5 $21.0 $32.3 $37.8 $42.5 YOY Growth -33.7% 137.0% 81.8% 240.5% 166.1% 296.6% 148.7% 53.3% 17.2% 12.4% Cost of Goods Sold $0 $0 $0 $0.027 $0.012 $0.0 $0.1 $0.5 $1.0 $1.5 Product Gross Margin - - - - 72.7% 75.0% 75.0% 75.0% 75.0% 75.0% Operating, General & Admin $3.186 $3.527 $1.262 $1.901 $1.660 $1.9 $6.7 $10.0 $12.5 $15.0 % SG&A 89.3% 41.7% 38.3% 34.3% 29.5% 16.5% 32.0% 31.0% 33.1% 35.3% Research & Development $2.205 $1.517 $0.308 $0.341 $0.388 $0.3 $1.4 $2.0 $2.0 $2.0 % R&D 61.8% 17.9% 9.4% 6.1% 6.9% 3.0% 6.6% 6.2% 5.3% 4.7% Amortization & Depreciation $0.578 $1.025 $0.277 $0.277 $0.277 $0.3 $1.1 $0.8 $0.7 $0.6 Operating Income ($2.400) $2.389 $1.446 $3.001 $3.299 $9.0 $11.8 $19.0 $21.6 $23.4 Operating Margin -67.2% 28.2% - - - - 55.9% 58.8% 57.1% 55.1% Interest & Other Net $0.089 $0.155 $0.055 $0.060 $0.064 $0.1 $0.2 $0.1 $1.1 $2.1 Pre-Tax Income ($2.311) $2.544 $1.501 $3.061 $3.363 $9.0 $12.0 $19.1 $22.7 $25.5 Taxes / Other $0 $0 $0 $0 $0 $0 $0 $0.0 $0.0 $0.0 Tax Rate 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Net Income ($2.311) $2.544 $1.501 $3.061 $3.363 $9.0 $12.0 $19.1 $22.7 $25.5 YOY Growth - -210.1% - - - - -618.8% 648.8% 89.3% 33.9% Reported EPS ($0.10) $0.10 $0.06 $0.13 $0.14 $0.36 $0.49 $0.76 $0.89 $0.98 YOY Growth - -209.3% - - - - -611.8% 630.6% 82.3% 28.7% Shares Outstanding 24.2 24.4 24.4 24.5 24.6 24.7 24.6 25.0 25.5 26.0 Source: Zacks Investment Research, Inc. Jason Napodano, CFA
HISTORICAL ZACKS RECOMMENDATIONS Chart Generated by Yahoo! Inc. Initiation of Coverage = 1/03/2012 @ $0.64 / share
DISCLOSURES The following disclosures relate to relationships between Zacks Small-Cap Research ( Zacks SCR ), a division of Zacks Investment Research ( ZIR ), and the issuers covered by the Zacks SCR Analysts in the Small-Cap Universe. ANALYST DISCLOSURES I, Jason Napodano, CFA, hereby certify that the view expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the recommendations or views expressed in this research report. I believe the information used for the creation of this report has been obtained from sources I considered to be reliable, but I can neither guarantee nor represent the completeness or accuracy of the information herewith. Such information and the opinions expressed are subject to change without notice. INVESMENT BANKING, REFERRALS, AND FEES FOR SERVICE Zacks SCR does not provide nor has received compensation for investment banking services on the securities covered in this report. Zacks SCR does not expect to receive compensation for investment banking services on the Small-Cap Universe. Zacks SCR may seek to provide referrals for a fee to investment banks. Zacks & Co., a separate legal entity from ZIR, is, among others, one of these investment banks. Referrals may include securities and issuers noted in this report. Zacks & Co. may have paid referral fees to Zacks SCR related to some of the securities and issuers noted in this report. From time to time, Zacks SCR pays investment banks, including Zacks & Co., a referral fee for research coverage. Zacks SCR has received compensation for non-investment banking services on the Small-Cap Universe, and expects to receive additional compensation for non-investment banking services on the Small-Cap Universe, paid by issuers of securities covered by Zacks SCR Analysts. Non-investment banking services include investor relations services and software, financial database analysis, advertising services, brokerage services, advisory services, investment research, investment management, non-deal road shows, and attendance fees for conferences sponsored or co-sponsored by Zacks SCR. The fees for these services vary on a per client basis and are subject to the number of services contracted. Fees typically range between ten thousand and fifty thousand per annum. POLICY DISCLOSURES Zacks SCR Analysts are restricted from holding or trading securities in the issuers which they cover. ZIR and Zacks SCR do not make a market in any security nor do they act as dealers in securities. Each Zacks SCR Analyst has full discretion on the rating and price target based on his or her own due diligence. Analysts are paid in part based on the overall profitability of Zacks SCR. Such profitability is derived from a variety of sources and includes payments received from issuers of securities covered by Zacks SCR for services described above. No part of analyst compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in any report or article. ADDITIONAL INFORMATION Additional information is available upon request. Zacks SCR reports are based on data obtained from sources we believe to be reliable, but are not guaranteed as to be accurate nor do we purport to be complete. Because of individual objectives, this report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed by Zacks SCR Analysts are subject to change without notice. Reports are not to be construed as an offer or solicitation of an offer to buy or sell the securities herein mentioned. ZACKS RATING & RECOMMENDATION ZIR uses the following rating system for the 1047 companies whose securities it covers, including securities covered by Zacks SCR: Buy/Outperform: The analyst expects that the subject company will outperform the broader U.S. equity market over the next one to two quarters. Hold/Neutral: The analyst expects that the company will perform in line with the broader U.S. equity market over the next one to two quarters. Sell/Underperform: The analyst expects the company will underperform the broader U.S. Equity market over the next one to two quarters. The current distribution is as follows: Buy/Outperform- 16.5%, Hold/Neutral- 77.7%, Sell/Underperform business day immediately prior to this publication. 5.1%. Data is as of midnight on the Zacks Investment Research Page 5 scr.zacks.com