Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Cipher Pharmaceuticals quarterly conference call for the company's first quarter 2025 results. 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 the call, you may press the star followed by the zero on your push-button phone. As a reminder, this conference is being recorded today, Friday, May 9, 2025. On behalf of the speakers that follow, listeners are cautioned that today's presentations and the responses to questions may contain forward-looking statements within the meaning of safe harbor provisions of the Canadian Provincial Securities Laws. Forward-looking statements involve risk and uncertainties, and enduring 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 risk 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. 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.
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 first quarter results were a combination of continued strength from Cipher's base business and strong momentum from our recently acquired U.S. Natroba business. First, I would like to spend some time commenting on the U.S. Natroba business. Revenues were $6.7 million during the first quarter of 2025, which was consistent with our expectations when we acquired the business this past July. Given the seasonality for the product, generally lower during colder months of the calendar year and higher demand in the upcoming warmer months of the year, we believe this revenue result has positioned the business well to start 2025.
Additionally, the business generated gross margins of $5.8 million were approximately 87% when excluding non-cash adjustments. As I previously described in our results from the business in 2024, we have completed the transition of the business from legacy arrangements, which have benefited the business in the first quarter of 2025, with this strong gross margin result. More importantly, are expected to provide a strong benefit to the business for the remainder of 2025 and beyond. Our growth strategy related to Natroba continues to be four-fold. Building the business in the U.S. where studies have shown permethrin-based products are no longer effective due to resistance issues. Second, launch Natroba in Canada through our existing Canadian infrastructure. Thirdly, out-license the product globally as the resistance issue is not unique to North America, but rather a global issue.
Lastly, in-license or acquire complementary products to be sold by the existing U.S. sales force. Demonstrating momentum on the first area of our strategy, we are proud to announce that recently the state of Illinois made Natroba the preferred product of choice given its one-dose complete cure for scabies, and whereby the incumbent treatment, permethrin 5%, is now non-preferred under Medicaid. As a greater number of physicians in Illinois will become familiar with the safety and efficacy of Natroba, we believe this will be a catalyst in their prescribing habits moving forward. We will be continuing to work with various states as we have a large number of Medicaid reimbursement arrangements across the U.S. to look to build upon this great development in Illinois this past month.
With respect to the second area of our strategy, launching Natroba in Canada, we had previously indicated that our earnings call on the fourth quarter of 2024, a pre-meeting with Health Canada related to our new drug submission, is planned to take place before the end of the second quarter of 2025. We are continuing to make progress with respect to our plans to bring Natroba to Canada and will provide updates as developments occur. For the third area of our strategy, we are also continuing to pursue opportunities for Natroba globally. As we have mentioned in the past earnings call, we believe there is a high unmet need for a highly effective product like Natroba to address lice and scabies indications in other territories globally, with the product being particularly well-suited in warm climate regions.
We currently have ongoing out-licensing discussions with seven parties that are interested in Natroba in different territories. As developments occur with respect to out-licensing of Natroba globally, we will continue to provide updates. I will speak further on our fourth leg of growth later in my discussion. Turning now to our base business, although our revenue and earnings were lower than a year ago, the business continues to deliver reliable results and cash generation. Total revenues of CAD 5.3 million from our base business of Canadian product revenue and U.S. licensing revenue were 9% lower than the first quarter of 2024. However, we were able to grow our Canadian-based product sales to partially offset declines in our licensing revenue. As Ryan Mailling will describe in further detail, revenue from the Canadian product portfolio was 41% higher than this quarter a year ago. The U.S.
Licensing business experienced a decline due to lower contractual royalty rates, continuing generic competition, including new generic entrants to the market associated with the products in the U.S., and reduced shipments as Cipher earns revenue from supplying product to our distribution partners. Adjusted EBITDA from the base business was $2.9 million and continues to be a reliable source of cash flow. Included in the adjusted EBITDA are one-time legal costs associated with defending our product portfolio through a contractual arbitration process. While these one-time costs of $1 million are significant, we believe it was prudent to defend our base business through the contractual mechanisms available to us and expect results from the arbitration process when reporting our second quarter results. Lastly, I want to highlight our $6.2 million total adjusted EBITDA during the first quarter of 2025 and our cash balance of $22 million at the end of the quarter.
As we have shown a track record of strong capital allocation in the past, we will continue to do so going forward. We will be using our available cash as well as future cash generated from the business in a balanced approach in the following areas: repay portions of the debt outstanding on our revolving credit facility. Number two, as announced on May 1st, we have recommenced our normal course issuer bid with an intention to utilize block repurchases. Thirdly, continue to focus on accretive acquisitions such as our recent Natroba acquisition to deliver strong shareholder returns. Finally, I would like to highlight that we are continuing to pursue other strategic business development opportunities, including acquiring or in-licensing products that are complementary to our existing portfolio and company acquisitions that are either accretive or that have a specific strategic purpose.
Our Chief Business Officer continues to be focused on identifying, evaluating, and pursuing various business development opportunities, and we are in active discussions with several parties. However, as we have said before, these discussions do take time, and the opportunities may or may not come to realization, but we will continue to provide updates as developments occur. As we demonstrated with our recent Natroba acquisition, we will continue to be selective in our approach to pursuing these opportunities to ensure that we are executing on the right opportunities. Thank you again for joining us here today, and I look forward to answering your questions after our prepared remarks. I will now pass the call over to our CFO, Ryan Mailling. Please go ahead, Ryan.
Thanks, Craig. 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 first quarter of 2025, being the three-month period ended March 31, 2025. Total net revenue was $12 million in the first quarter of 2025, an increase of $6.1 million, or 105%, when compared to the same period in 2024. The increase was due to the addition of the Natroba business at the end of July 2024. Overall licensing revenue was $700,000 for the first quarter of 2025, compared to $2.6 million in the same quarter of the prior year, representing a 72% decrease. The decrease is due to lower year-over-year product shipments of $1 million, whereby we earned revenue from supplying product to the distribution partner.
The remaining decrease of $900,000 is due to lower contractual royalty rates and increasing generic competition in the U.S. related to the U.S. licensing products. Licensing revenue from Absorica in the U.S. was $300,000 in the first quarter of 2025, a decrease of $1.6 million, or 84%, when compared to the same period in 2024. Revenue from Absorica was primarily impacted by the year-over-year decline in product shipments that I previously mentioned. Market share from Absorica and the authorized generic of Absorica was 5.6% at March 31, 2025, representing a decrease of 0.2% compared to March 31st, 2024. Licensing revenue from Lipofen and the authorized generic of Lipofen was $400,000 for the first quarter of 2025, representing a decrease of $300,000 compared to the same period in the prior year.
Moving to our product portfolio, total product revenue was $11.3 million for the first quarter of 2025, an increase of $8 million compared to the first quarter of 2024. Product revenue from the Natroba business, comprised of the brand Natroba and its authorized generic Spinosad, was $6.7 million in the first quarter of 2025, representing a significant portion of the $8 million total increase in product revenue I described. Product revenue from the Canadian portfolio in the first quarter of 2025 was $4.6 million, an increase of $1.3 million, or 41%, compared to the same quarter in the prior year. Additionally, as sales for our Canadian product portfolio are denominated in Canadian dollars, when translated on a constant currency basis, the Canadian product portfolio revenue increased by $1.6 million, representing an increase of 50% over the first quarter of 2024.
All products in our Canadian product portfolio saw increased sales compared to the same quarter in the prior year, contributing to the overall increase in revenue. Selling, general, and administrative expenses were CAD 5 million for the first quarter of 2025, an increase of CAD 3.5 million from the comparable period in the prior year. The increase is attributable to higher SG&A costs from the acquired Natroba business of CAD 2.6 million, as well as the CAD 1 million of one-time costs associated with the arbitration process that was previously described in Craig's remarks. Net income for the three months ended March 31st, 2025, was CAD 2.6 million, or 10 cents per diluted common share, compared to CAD 4.9 million, or 20 cents per diluted common share for the same period in the prior year.
The decrease in net income of $2.3 million was primarily attributable to $4.3 million of higher total gross profit, which was offset by $1.5 million of higher amortization on the recently acquired Natroba intellectual property, $1.3 million lower income tax recovery in the first quarter of 2025, $1.1 million higher interest costs resulting from interest expense of $500,000 in the first quarter of 2025, compared with net interest income of $600,000 in the first quarter of 2024, and the $1 million of one-time costs associated with the arbitration process. Adjusted EBITDA for the first quarter ended March 31, 2025, was $6.2 million, compared to the $3.6 million for the same quarter in the prior year. This meaningful increase of 73% was mainly driven by the previously mentioned addition of the Natroba business and growth from our Canadian product portfolio, which is partially offset by declines experienced in the U.S.
Licensing revenue. The company had $22 million in cash and $40 million in debt as of March 31, 2025, and continues to generate free cash flow from our operations. Subsequent to the first quarter of 2025, yesterday, on May 8, 2025, Cipher allocated a portion of the cash it has accumulated from free cash flows to make a repayment of $15 million of the outstanding balance on its revolving credit facility. Accordingly, after making this payment, the company now has a reduced debt balance of $25 million outstanding on its revolving credit facility. Cipher's base business, particularly its Canadian product portfolio, combined with the Natroba business, is performing well and contributing to meaningful cash generation. We've also taken steps to further delever the balance sheet subsequent to quarter end, which is already at a comparatively low leverage while retaining the availability of this financing.
With a strong financial posture and established growth leverage, Cipher is well-positioned to execute on further growth opportunities, providing further value for our shareholders. We'll now open the call up to questions.
Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session. If you have a question, please press the star key followed by one on your touchstone phone. You will hear a one-tone prompt acknowledging your request. Your question will be polled in the order they are received. If you would like to decline from the polling process, please press the pound key. Please ensure you lift the handset if you are using a speakerphone before pressing any keys. Our first question comes from the line of Andre Uddin from Research Capital. Your line is open.
Bryan and Ryan, I just had a few quick questions. Can we get an update on how many U.S. sales reps you currently have?
Oh, hey, Andre. Our current field rep complement is—so I'm just running the quick math in my head—is about 36 reps.
Reps in. Have you hired any MSLs, or are you going to hire any MSLs?
MSL?
Yes, like medical science liaisons?
We have consultants that help us on that. For a long period of time, there have been very strong KOLs, dermatologists mainly, as well as nurse practitioners that specialize in dermatology that help us with speaking at conferences. They are very bullish on the product. They love it because it's the only thing that works. That is usually how we use the medical liaison. We do not have a full-time head associated with that, but our consultants fill that role.
Can you just also remind us in terms of what regions your sales force is focused on in the U.S.?
Yeah. If you take a look at the TRX for the antiparasitic market, the major states where the majority of the scripts are in order are Texas, followed by California, followed by Florida, followed by New York State. That is where you would have about 40% of the total TRX, and the other 60% is kind of scattered through the remainder of the states.
That's it for me. Thanks, Bryan.
Our next question comes from the line of Justin Keywood from Stifel. Your line is open.
Good morning. Thanks for taking my call. A follow-up on the preferred Medicaid status in Illinois. How should we interpret that? Should we expect additional states to follow, and is this impactful on the overall financials?
Hey, Justin, it's Bryan here. When you look at an individual state basis, it certainly contributes, and it wins when we're on formulary for Medicaid. You'll typically have a pretty strong share, but you won't get it all. When you then climb up and you'd say, "Okay, the incumbent Permethrin 5% is now non-preferred," then you kind of get all of the Medicaid business in the state. That's kind of the way to look at it. It's each state where it occurs and how much of that incremental Medicaid market share do you get as a result of what a state might implement like Illinois.
The opportunity going forward is obviously when you have one state that the pharmacy directors look at the product and say, "Clearly, this is what should be prescribed and not 5% permethrin." We do believe that it's an opportunity where other states can follow. Medicaid contracts typically come up for renewal, like a new bid process. It varies by state, but it's typically annually or biannually. What we're doing is now, when those bids come up for their natural renewal, we're going with them with options on pricing in the same regard as Illinois if they make Natroba the sole preferred product in the category. We think that's compelling because, again, it'll already have some good volume and demand in the state.
They'll see that when the bid comes up for renewal, and then they'll see they get preferred pricing if they're willing to do what Illinois did. It is a good compelling story. We do believe that we're going to be able to replicate it in more states, but I can't promise when and where.
Great context. Thank you, and we will look forward to those developments. Then on the debt repayment or the credit facility repayment of $15 million, just trying to understand just the use of capital and capital allocation going forward. Is that indication that there may not be a near-term M&A and the most prudent use of capital is to pay down the debt, or how should we be interpreting that?
Justin, it's Craig here. Yeah, we examined different options of what to do with the cash that we had sitting in our bank account. It was not the best use of that. Our credit facilities with National Bank allow us to draw upon a $65 million credit facility at any point in time without cost. We do not have a deal that we could see closing in the next couple of months. We thought that it would be best to pay that down and lower our interest costs. We can re-access that money at any point in time.
Understood. How is the pipeline? I know there are a few active files. Have the multiples changed at all, just given the market backdrop?
We haven't seen a significant change in pricing of deals. I think I said in my remarks that we've got a number of targets that we're working on now. That's after sifting through at least a dozen opportunities that the majority of them didn't fit with our plans. We will continue to be disciplined in our approach here, but I'm still optimistic that there are deals out there that are at the right price level and would fit well with our strategy.
Would these assets be in DERM, and would they be cross-border assets, or U.S. or Canada?
Our first priority is the U.S., where we've got the existing infrastructure and the sales group that Bryan talked about, the 36 reps. That would be our top priority. In at least two cases, the products would be for North America. If we decided to move forward and we got a deal, we would focus on the U.S., but bring the product to Canada as well.
Great. Thank you.
Our next question comes from the line of Doug Loe from Leede Financial. Your line is open.
Thanks very much. Yeah, congratulations, gents, on the quarter. Just with regard to your earlier commentary about Natroba sales, perhaps exhibiting some seasonality and targeting higher incidence of head lice and scabies infestations in the summer months. Is it at all possible to sort of quantify the magnitude of seasonality that we might expect on the revenue bump in Q2 and Q3?
Hey, Doug, it's Bryan here. The one area that I would probably point you to is, I think, as part of the bar reporting, you have to have some historic financial information, and that would have been actuals from ParaPRO. I think that's a good basis to take a look at because there really just you would have seen the seasonality in some of those peak times. That'd be the easiest way. What do I expect? I expect pretty high performance from the U.S., as does our board, as do our shareholders. You're going to see revenue kind of step up on a quarterly basis, certainly through Q2 and Q3. Your magnitude of that is probably going to be in the high singles, low doubles.
Okay. Good context. Thanks, Bryan. Maybe just kind of building on Justin's question with regard to the kinds of assets that you might deem to be suitable to bring into your North American pharma portfolio. Head lice is sort of DERM-adjacent more than DERM specifically, and so it's kind of a unique market in that way. I'm just kind of wondering, how are you thinking about what target therapeutic indications sort of make sense in order to leverage the U.S. and Canadian marketing infrastructure that you have in place? Is exclusively DERM sort of where you're looking, or are there other adjacent medical markets that might make sense? Just kind of talk me through that a little bit.
Yeah. Doug, thanks for bringing that up. I should have mentioned this in responding to Justin's question as well earlier. Our sales force, again, we've got some geographic focus to them, but they're calling on—they're not necessarily calling on DERMs very often, just given the difficulties and waiting list to see a DERM. We're focused more on nurse practitioners, physician's assistants who often deal with cases related to lice and scabies. Products that we're looking for would be complementary to that call point. That's really our focus at the moment. It doesn't have to be strictly DERM. It could be for other indications that these particular professionals are prescribing.
Sounds great. Good feedback there. I'd be remiss not to sort of ask a question about Absorica, which years ago was doing $3 million-$5 million in quarterly royalties, and now is trending to nothing. Just wonder if there were any unusual factors other than just lower shipments in the quarter, or if there is some mechanism by which the trajectory there can be reversed. Supplemental to that question, are there any sort of contractual elements that you could bring to bear so that you might be able to acquire marketing rights for Absorica yourself so that you can generate better success that is more comparable to what you're achieving in Canada with Epuris? I'll leave it there. Thanks.
Doug, we're disappointed in Sun's performance with Absorica. We think that they could be more aggressive with their pricing because it's very much a pricing issue now for Absorica, given the generic segment that it's in. We're meeting with Sun and have met with Sun to bring pressure to them to bring more efforts to this product. We continue to work with them, and we'd like to reverse this trend. At the end of the day, the contract expires at the end of December 2026, and we're looking at several options around what will happen when that contract expires, including the idea of bringing it in-house and bringing on people that can focus on the distribution of that product, including more competitive pricing. It's not forever. At the very least, we'll be taking the product back at the end of December 2026.
Yeah. No, understood. Okay. Thanks, gents. That's it for me.
There are no further questions from our phone lines. I would now like to turn the call back over to Mr. Mull. Please go ahead.
Thank you very much for attending our call today. We feel that we're doing a good job executing on our plans here and look forward to giving you future updates in the coming months. Thanks again for joining.
Ladies and gentlemen, this concludes your conference call for today. Thank you for participating. You may now disconnect.