Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Cipher Pharmaceuticals quarterly conference call for the company's third quarter 2026 financial 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 zero on your push-button phone. As a reminder, this conference is being recorded Friday, November 13, 2026. On behalf of the speakers that follow, listeners are cautioned that today's presentation and the response 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.
The 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 actual results to vary, please refer to the risks identified in the company's annual information form and under 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, 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 US dollars, unless otherwise specified. Cipher's third quarter of 2026 continued to demonstrate the strength of our highly profitable specialty pharma dermatology platform. Net revenue of $12.7 million was essentially in line with the third quarter of the last year, as growth in Epuris and higher licensing revenue largely offset lower Natroba sales in the U.S. We reported net income of $10.9 million, or $0.42 per diluted share, which includes the favorable impact of the arbitration award that our CFO, Ryan Mailling, will discuss in his remarks, and adjusted EBITDA of $7.2 million, representing an adjusted EBITDA margin of 57%. Ryan will provide a detailed overview of our financial results following my commentary.
Turning to our commercial portfolio, revenue from Natroba and its authorized generic spinosad for the third quarter of 2026 was $7.1 million, compared to $8.1 million for the same quarter in the prior year, a decrease of 12%. As in the prior quarter, the decrease was driven by lower sales volumes to Medicaid-covered patients, arising from reductions in the number of covered lives under the Medicaid programs. However, despite the impacts from the reductions in Medicaid programs, the performance of Natroba is demonstrating improvement with a 14% sequential increase in revenue during the third quarter of 2026, compared to the second quarter of 2026, well ahead of the 4% sequential increase we saw over the same period last year. We continue to invest in expanding the U.S. business beyond the Medicaid payer channel, including through the commercial payer, direct-to-patient, and retail pharmacy initiatives we outlined last quarter.
This investment is reflected in higher selling and marketing spend in the third quarter, driven by expanded marketing campaigns focused on increasing awareness of Natroba in the U.S. Natroba also represents a potential opportunity outside of the U.S., including Canada and other rest-of-the-world markets. We announced in January, Health Canada has accepted for review our New Drug Submission for Natroba for the treatment of head lice and scabies, and the results of the review are expected soon and likely in the first quarter of 2027. Head lice products currently available in Canada and other countries globally have, like in the U.S., become less effective due to its resistance, and we believe Natroba fulfills an unmet need in many markets outside the U.S. with a proven single treatment option.
During the quarter, we also strengthened our out-licensing efforts for Natroba and are seeing interest from parties in various markets, given the high unmet need and the effectiveness of the product in being able to address those needs. Our Canadian portfolio continued to deliver growth during the quarter. Product revenue from the Canadian portfolio was CAD 4.3 million for the third quarter of 2026, an increase of 8% compared to the same quarter in the prior year. Revenue from Epuris was CAD 3.9 million, an increase of 15% compared to CAD 3.4 million in the same quarter last year. Market share for Epuris increased from 48.7% as of September 30, 2026, according to IQVIA, up 1.6 percentage points from 47.1% in June of 2026. We also made significant progress on public reimbursement for Epuris during the quarter.
Following the letter of intent signed by the pan-Canadian Pharmaceutical Alliance in July, we have worked with the federal and provincial territorial drug plans, and have now finalized the majority of the additional Product Listing Agreements, including in three key markets. Public funding for Epuris became effective August 17 in British Columbia, on August 27 in Quebec, and October 1st in Alberta, among other jurisdictions across Canada. Listing of these public drug plans provides wider access for Epuris for patients who are not previously covered and expands Cipher's addressable market for the product. We expect this expanded coverage to continue contributing to market share growth over time, particularly in key markets where a sizable portion of the patient population has drug coverage through publicly funded drug plans, which were previously not accessible to Cipher.
We have also increased our sales and marketing initiatives in Canada in connection with this expanded coverage. This is truly a beneficial development for the Canadian patient population navigating severe nodular acne. For the remainder of my commentary, I would like to provide an update on our business development activities, which remain a key area of focus for Cipher. On September 21, we announced the appointment of Mr. Rajiv De Silva to our board of directors. Mr. De Silva brings over 30 years of experience in the healthcare sector, including board and executive leadership positions, and has a proven track record of guiding high-growth organizations through complex mergers and acquisitions. His extensive background in M&A and corporate strategy is expected to strengthen the execution of our growth strategy. With this appointment, our board expands to four members, three of whom are independent.
We continue to pursue our three distinct strategies in addition to our existing business in order to drive future shareholder value and growth of our business. Firstly, we are looking for acquisitions or in-licensing opportunities of complementary products. Secondly, we are looking to out-license both Epuris and Natroba to markets outside of North America. Lastly, we are looking for company acquisitions for strategic value. The first area of our growth strategy is the pursuit of the acquisition or in-licensing of complementary products, which can be directly commercialized through our existing Canadian and U.S. commercial infrastructure. We continue to source and explore opportunities in this area and have been assessing some of these opportunities in detail, including holding discussions with vendors during and subsequent to the third quarter. We remain optimistic that we will find an opportunity that is the right fit for Cipher.
However, as we have said previously, these activities take time. The time horizons on each opportunity vary, and the opportunities may or may not come to realization in the end. The second strategy is pursuing out-licensing opportunities for both Natroba and Epuris outside of North America. We continue to believe there is a high unmet need for a highly effective product like Natroba to address head lice and scabies in other territories globally. Similarly, 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. To provide additional support and strengthen our out-licensing efforts, we have recently engaged a consulting firm with expertise in assisting companies achieve their strategic business development objectives.
This firm is assisting with out-licensing efforts for both products, which to date has been beneficial in the process, and we are receiving additional interest from parties for both products from various markets. In addition to assisting with our out-licensing efforts, the firm we have engaged is also assisting our internal team in identifying potential product acquisitions or in-licensing targets, which is expected to broaden the opportunities available to us. Thirdly, the third part of our strategy 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 pursuing our other business development strategies and in our ongoing and future operations.
As we discussed last quarter, we are in the advanced stages of a process for an acquisition target earlier this year, but ultimately determined that not continuing was the right decision for Cipher, and a deal did not materialize. Following the advanced stage opportunity that ultimately did not materialize, we continue to actively source, evaluate, and pursue potential acquisitions that achieve our objectives, and we believe that the addition of Mr. De Silva to our board will strengthen our ability to execute in this area. We remain optimistic that we will achieve success in finding and executing on the right opportunity. Although a transaction has not come together to date as a result of the three growth strategies we are pursuing, this remains a key focus area for Cipher, to which we are dedicating resources and believe we are making meaningful progress.
We remain optimistic we will ultimately achieve success in finding 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 US dollars unless otherwise noted. Today, Cipher Pharmaceuticals is reporting results from the company's third quarter and year-to-date 2026, which are the three and nine-month periods ended September 30, 2026. Before I review the results, I want to begin with the arbitration award that Craig briefly mentioned earlier, as developments related to this during the quarter had a pervasive impact on our third quarter results. On September 1st, we announced that a New York federal court ruled in Cipher's favor with respect to the appeal process that was launched in respect of the previously announced award from an arbitrator.
In connection with our contractual dispute related to certain clinical data and its launch of Absorica and its launch of a product in Canada, the court denied the petition to partially vacate the arbitration award and affirmed the award, including the declaration that Cipher is the rightful owner of clinical data in dispute. The court affirmed the following remedies in Cipher's favor: one, compensatory damages of CAD 4.2 million, a 15% royalty on net sales of Absorica LD in Canada beginning on January 1st, 2026, running through to the end of 2040, and 80% of our out-of-pocket attorney's fees and certain expenses directly related to that arbitration. The court also awarded us interest on the arbitration award until such time as it's satisfied. The award was not previously recognized in Cipher's financial statements prior to this quarter due to uncertainty surrounding the outcome of the court proceedings.
In October, subsequent to the end of the third quarter, we received payment of $5.7 million for the portions of the award related to the damages and our out-of-pocket attorney fees and certain other expenses, as well as interest. As a result, we recognized these portions of the award in our third quarter results. This included $2.3 million of other operating income from damages, a $2.2 million recovery within selling general and administrative expenses for previously incurred legal fees and certain other expenses, and $0.5 million of interest income. Because the recognized amounts are expected to be non-recurring and are not reflective of our core business, we've included arbitration-related recoveries as an adjustment item in our definition of adjusted EBITDA this quarter. As a result, although our net income includes these recoveries, adjusted EBITDA excludes the benefit of these recoveries.
I will refer to these items as I review the financial results for the third quarter and year- to- date. Total net revenue for the three and nine-month periods ended September 30, 2026, was $12.7 million and $37.3 million respectively. Net revenue for the third quarter of 2026 decreased by $0.1 million, or 1%, compared to the same quarter in 2025. Net revenue for the nine months ended September 30, 2026, decreased by $0.9 million, or 3%, compared to the same period in the prior year. Lower product revenue from Natroba was partially offset by growth in Epuris revenue and higher licensing revenue. Licensing revenue increased by $0.4 million, or 62%, to $1.2 million for the third quarter of 2026, and increased by $0.5 million, or 17%, to $3.5 million for the nine months ended September 30, 2026.
Licensing revenue from Absorica in the U.S. was $0.7 million for the quarter, an increase of $0.3 million, or 75%, and licensing revenue from Lipofen and its authorized generic was $0.5 million, an increase of $0.2 million, or 67%. Licensing revenue primarily benefited from higher product shipments to our distribution partners, on which we earn revenue from supplying product. Product revenue decreased by $0.6 million, or 5%, to $11.5 million for the third quarter of 2026, and decreased by $1.5 million, or 4%, to $33.8 million for the nine months ended September 30, 2026. Product revenue from Natroba and its authorized generics decreased by $1 million, or 12%, to $7.1 million for the quarter, and by $2.2 million, or 10%, to $20.3 million for the nine months ended September 30, 2026.
Product revenue from Natroba and its authorized generics for spinosad continued to be impacted by lower sales volumes to Medicaid-covered patients, arising from reductions in the number of covered lives under Medicaid programs. However, Natroba has demonstrated improvement over the last quarter, with a sequential quarterly increase of 14% over the second quarter of 2026. Product revenue from Epuris increased $0.5 million, or 15%, to $3.9 million for the quarter, and by $0.8 million, or 7%, to $11.9 million for the nine months. Epuris benefited from higher sales volumes for both periods compared to the prior year. Epuris also continued to gain market share during the third quarter, ending with 48.7% share of the isotretinoin market in Canada as of September 30, 2026, according to IQVIA. Cipher's business continued to be highly profitable, with 82% gross margin for the third quarter, which remained consistent with the third quarter of 2025.
On a year-to-date basis, gross margin increased by 1% - 81% for the nine months ended September 30, 2026, compared to 80% for the same period last year. This increase in gross margin for the year to date is largely due to the non-recurring fair value adjustments included in cost of products sold for the prior year. Total operating expenses, net of arbitration-related income and recoveries, decreased by $4.9 million or 62% to $3 million for the third quarter of 2026. Decreased by $8.4 million or 32% to $17.5 million for the nine months ended September 30, 2026. SG&A, which are included in total operating expenses, were $1.2 million for the third quarter of 2026, compared to $3.7 million during the same quarter the prior year. This is a decrease of $2.5 million or 68%.
For the nine months ended September 30, 2026, SG&A decreased by $5.3 million or 41% to $7.5 million from $12.8 million during the same period last year. As I mentioned earlier, these figures include $2.2 million of recovery of legal costs related to the arbitration award, which is non-recurring. Beyond this recovery, there were two other main drivers of change in our SG&A. The first being non-recurring legal costs incurred in the prior year, $1.2 million, as well as operational efficiencies that we have gained in our business during the year. The reduction in total operating expenses also benefited from $2.3 million of other operating income recorded during the third quarter of 2026, which is a non-recurring source of income earned in connection with the arbitration award.
Net income for the three months ended September 30, 2026, was $10.9 million, or $0.42 per diluted common share, compared to $5.5 million, or $0.21 per diluted common share in the prior year. The increase for the third quarter was primarily attributable to the arbitration-related income, recoveries, and interest. Net income for the nine months ended September 30, 2026, was $21.1 million, or $0.81 per diluted common share, compared to $14 million, or $0.54 per diluted common share for the same period last year. Similarly, the increase was attributable to arbitration-related income and recoveries, and the non-recurring expenses incurred in the prior year, including legal costs related to the arbitration, certain restructuring costs, and fair value adjustments to acquired inventory.
Adjusted EBITDA for the third quarter of 2026 was $7.2 million, compared to $7.3 million for the third quarter of 2025, representing a decrease of $0.1 million or 1%, and resulting in an adjusted EBITDA margin of 57%, which was consistent year-over-year. The decrease was largely attributable to lower gross profit, partially offset by lower selling, general, and administrative costs, excluding the arbitration recovery. Adjusted EBITDA for the nine months ended September 30, 2026, was $21.8 million, compared to $21.1 million for the nine months ended September 30, 2025, representing an increase of $0.7 million or 3%, with the adjusted EBITDA margin improving to 58% from 55% in the prior year. The increase in adjusted EBITDA margin was primarily attributable to reduced selling, general, and administrative expenses, partially offset by lower gross profit. Cipher continues to be highly profitable, cash generative, and debt-free.
We ended the quarter with $15.3 million in cash, up from $9.1 million at the end of the second quarter, and also collected an additional $5.7 million in cash subsequent to the end of the third quarter, bringing our cash balance to approximately $20 million post-quarter end. We retained $65 million of undrawn availability on our facility, plus a $25 million accordion feature that is subject to lender approval. This potential financing, along with cash on hand and continued positive operating cash flows, positions us well to continue investing in the growth strategy, which Craig had outlined.
Thanks, Ryan. Before we open up the call for questions, I wanted to reiterate and leave you with a few key items from our commentary. First, Cipher remains highly profitable and is debt-free, with gross margins of 81% and adjusted EBITDA margins of 58% on a year-to-date basis, and $15.3 million of cash at the end of the quarter. Second, the court's confirmation of the arbitration award is a significant win for Cipher. We have received $5.7 million in October, and the 15% royalty on net sales of Absorica LD in Canada through 2040 represents a further potential upside that has not yet been recognized in our results. Third, Epuris continues to build on its position as the market-leading isotretinoin product in Canada, with market share of 48.7%.
Public drug plan coverage is now in place in key markets, including B.C., Quebec, and Alberta, and we expect this expanded access to support further growth of the product. Fourth, in the U.S., Natroba continues to be impacted by reduced Medicaid volumes. However, we remain focused on expanding awareness of the product and its effectiveness and growing the commercial payer volumes. Finally, we remain highly active in the area of business development, including in-licensing of products, acquisitions of products or companies, and out-licensing of our existing portfolio. We have strengthened our board with the appointment of Mr. De Silva, who has extensive M&A experience. We view these activities as key growth drivers for Cipher. We will now open the call for questions, and at this point, I'll ask the operator to provide instructions for the question and answer session. Operator, please go ahead.
Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star one. To withdraw your question, press star two. One moment, please, for your first question. Your first question comes from André Uddin from Research Capital. Please go ahead. André, your line is now open.
Can you hear me now? Hello?
We can hear you.
Okay, great. Okay, thanks, operator. Hi, Craig, Bryan, and Ryan. I realize there have been some changes with Medicaid coverage. Are you still pursuing the Medicaid step-through process for Natroba in states other than Illinois?
I am going to pass the question to Bryan here.
Hey, André. Good morning. We are continuing to pursue that. Usually that decision is made at the state level P&T committee, if they were going to require a step-through. So, that decision is usually made at a clinical level versus the financial level. For the most part, when we are renewing with states, we do not get passed back to the clinical P&T committee to kind of look at that aspect of it. It is typically reviewing utilization, and we continue to have strong utilization in the state, which then implies a renewal of our Medicaid coverage, which is typically annually or biannually. It will vary by state. So, we do have the opportunity to speak to the P&T committee from time to time, but it is not pervasive with every negotiation of every state at renewal.
Okay. How long do you think that would take to get implemented in the different states?
Again, each year we're having a dialogue with the state, so the opportunity is always there. I can't really comment because if you say, "How long would it take to get implemented with the various states?" there's so many parties, and we're negotiating with so many at the time. We continue to use Illinois as the example to say, "If you would like even further preferred pricing, can we open up this discussion related to the clinical aspect and the step-through?" We have had some uptake there, just on a each state may not decide to do that. It's hard to pass down a timeline to that.
Okay, that's fair enough. Can you also please quantify the Natroba pipeline fill into Walmart? Specifically, how much of Q3's sequential revenue growth was actually attributed to initial stocking versus prescription demand?
Yeah, just because of sensitivities with the Walmart contract, and it's highly important to us in that relationship, talking about exactly the volume of the units, that's something we wouldn't want to divulge just because of that relationship with Walmart that's just started, as well as for competitive reasons. What I can say, and what I can offer is, the stocking program isn't just for certain stores across the U.S. It's all Walmart stores. With a bit of effort, we could indicate, okay, well, how many stores are there, and get a bit of an estimate of how many units would have went out. That's what I can kind of offer, kind of signal over to you.
Okay. All right. Have you also determined what you are going to do with Absorica marketing? Are you still thinking about Sun Pharmaceuticals, or is there any update there?
Yeah, André, we are having discussions with Sun about an extension, and we are also considering a proposal from another, basically, generic outfit.
Okay. Okay, that is it for me. Thank you.
Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star one. Your next question comes from Justin Keywood from Stifel. Please go ahead.
Good morning. Nice to see the strong cash generation. On that, given the balance sheet is to become more robust with the arbitration proceeds, how do you balance share buybacks with potential capital deployment? Also, on buybacks, I noticed a relatively small amount was executed on in Q3, and if perhaps a SIB, or substantial issuer bid, could be on the table. Just how are you balancing capital deployment for the rest of this year and going into next?
Justin, Craig here. The way that we're looking at it is, if we feel we've got a deal that's close, we may pull back a bit on the share purchase, the NCIB. I also got to tell you that the NCIB program is very restrictive. I mean, there's only so much that we can buy. That's one of the reasons why we have been considering a SIB as a more effective way to buy back our stock.
Understood.
Does that answer your question?
Yeah. No, that's helpful. As we look at potential acquisitions and the timing of, I remember with Natroba, there was some timing provided on the next transaction. Do you have that visibility today when you expect to execute on the next deal?
Well, I know what my hopes are. But like I'm saying, I don't really want to say, "Hey, something's imminent," because then if it was, the other side, the vendor would be in a better position for leveraging the price, etc . All I can tell you, Justin, is that there's a lot of activity. There's lots of opportunities that we're seeing right now. And again, I am expecting that we get something done in the short term.
And would that be skewed to in-licensing companies and by geography, if there's any preference?
Well, we want to expand that U.S. business. We want to get more volume going through that infrastructure that we have in the U.S. So, I would say that's a priority for us, although we are also looking at some opportunities in Canada.
Understood. Thanks for taking my questions.
Thanks, Justin.
Your next question comes from Doug Loe from Leede Financial. Please go ahead.
Thanks, operator, and good morning, gentlemen. Just following up on some of the commentary on Natroba, specifically for Bryan, one of the main drivers for Natroba adoption was the emergence of permethrin-resistant strains in the general population. Based on historic Natroba quarterly revenue data since you acquired it's not obvious that that's having any material impact on your sales. Maybe you can kind of comment on whether or not your ability to capture market share from permethrin can be a material revenue driver in markets where you currently sell the drug, and over what timeframe?
The answer plainly is yes. There aren't more effective options in addition to Natroba. It's clearly superior to permethrin, so permethrin five for the treatment of scabies. That's virtually the only other scabies treatment indicated. We have a full picture there. With head lice, it's a bit more difficult because, as we've seen with the marketplace, it's a lot more common where people will go and try OTC products. Most people are just ingrained of, they don't even know about what pyrethrin or permethrin is. They just run to Walgreens or CVS and pick up something and kind of use that as an alternative. They won't do that research. A lot of times, head lice isn't treated like a medical condition until it becomes more serious.
Those are the patients that we capture, the ones that do treat it a bit more seriously or typically fail on permethrin over and over, and then they will do a bit more research and get prescribed by a physician. What are we doing about that? One of the things that we are doing is, over the course of 2026, we have invested heavily in marketing to help educate on the brand, the effectiveness, and Natroba. It is a superior product. Really kind of getting into that from a head lice perspective, and then our field force is really out there and unentrenching prescribers who believe permethrin 5% is the only thing you can use to treat scabies, and saying there is a superior topical option.
That is kind of the two-pronged strategy that we are having to go after, kind of the head lice indication and the permethrin 1% competition, and the permethrin 5% on the scabies indication.
Great. Thanks, Bryan. That is helpful. Maybe just one question on pipeline build-out. Craig, you have obviously had a positive relationship with Galephar over the years, specifically with Absorica or Epuris. I was just wondering if there is anything in the pipeline that could be if there is anything in development that is based on the Lidose platform that could be relevant to your pipeline build-out. I will leave it there. Thanks.
We are in constant communication with Galephar on different projects that they are looking at, some of which fit for us and some that do not. We have not seen anything probably in the last six months from Galephar. We are usually the first people that they talk to when they have got something that they feel might be worth developing. Nothing at the moment, but that changes from time to time.
Fair enough. Thanks.
There are no further questions at this time. I will turn the call back over to Craig for closing remarks.
Thank you. Before signing off, I would like to take this opportunity to thank everyone for joining us on the call today. We look forward to continuing to update you on Cipher's progress. Again, thank you for your time.
Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you.