market capitalization of $50 million. Cipher currently ... 4, 2012_T.DND_Initaiti… · based on unique extrusion and spheronization methods which produces beads containing up to

© Copyright 2012, Zacks Investment Research. All Rights Reserved.

Cipher Pharmaceuticals Inc. (DND-TSX)

Current Recommendation Outperform

Prior Recommendation N/A

Date of Last Change 01/03/2012

Current Price (01/04/12) $0.64

Target Price $2.25

INITIATION

SUMMARY DATA

Risk Level Average,

Type of Stock Small-Value

Industry Med-Biomed/Gene

We are initiating coverage of Cipher Pharmaceuticals Inc. with an Outperform rating and $2.25 price target, or a market capitalization of $50 million. Cipher currently trades with a market capitalization of only $16 million.

Based on our model, the stock is currently trading below the net present value of the cash flows from Lipofen and ConZip / Durela, plus the cash on hand. That means investors can purchase the stock today and get the CIP-Isotretinoin product, a potential $200 million opportunity in the U.S., for free.

Our DCF model calculates fair-value at $2.25 per share. We would be buyers of the stock at today s price.

52-Week High 1.35

52-Week Low 0.64

One-Year Return (%) -45

Beta 1.2

Average Daily Volume (sh) 3392

Shares Outstanding (mil) 24.3

Market Capitalization ($mil) 15.5

Short Interest Ratio (days) N/A

Institutional Ownership (%) N/A

Insider Ownership (%) N/A

Annual Cash Dividend $0.00

Dividend Yield (%) 0.00

5-Yr. Historical Growth Rates

Sales (%) N/A

Earnings Per Share (%) N/A

Dividend (%) N/A

P/E using TTM EPS N/A

P/E using 2011 Estimate N/A

P/E using 2012 Estimate N/A

Small-Cap Research

scr.zacks.com

111 North Canal Street, Chicago, IL 60606

January 4, 2012

Jason Napodano, CFA 312-265-9421

[email protected]

DND: Initiating Coverage on Cipher Pharma with Outperform Rating / $2.25 Target.

ZACKS ESTIMATES

Revenue (millions of $)

Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec)

2010 0.9 A 2.2 A 1.1 A 1.2 A 5.4 A 2011 0.7 A 0.7 A 1.1 A 1.0 E 3.6 E 2012 4.9 E 2013 8.6 E

Earnings per Share (EPS is operating earnings before non recurring items)

Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec)

2010 -$0.02 A $0.03 A -$0.01 A $0.00 A $0.01 A 2011 -$0.05 A -$0.02 A -$0.01 A -$0.01 E -$0.09 E 2012 -$0.02 E 2013 $0.10 E

Zacks Investment Research Page 2 scr.zacks.com

WHAT S NEW

Initiating Coverage

We are initiating coverage of Cipher Pharmaceuticals Inc. with an Outperform rating and $2.25 price target, or a market capitalization of $50 million. Cipher currently trades with a market capitalization of only $16 million. We believe the story is largely de-risked and under-appreciated by the Street. Cipher currently has two revenue streams in place with royalties and milestones on sales of Lipofen (CIP-fenofibrate) at Kowa Pharma in the U.S. and the recently launched ConZip (CIP-tramadol-ER) at Vertical Pharma in the U.S. We expect a third royalty and milestone stream from the launch of Durela (CIP-tramadol-ER) at Medical Futures within the next few months.

We have established what we believe to be conservative forecasts for these revenue streams going forward to patent expiration on each product, Lipofen (Q1-2015) and ConZip/Durela (2022). We remind investors that Cipher has little to no ongoing costs associated with either product. Finally, we forecast that Cipher will exit 2011 with approximately $9 million in cash and equivalents.

CIP-Isotretinoin Offers Big Upside

Based on our model, the stock is currently trading below the net present value of the cash flows from Lipofen and ConZip / Durela, plus the cash on hand. That means investors can purchase the stock today and get the CIP-Isotretinoin product, a potential $200 million opportunity in the U.S., for free. Cipher has licenses the rights to CIP-Isotretinoin to Ranbaxy, a major player in the generic Isotretinoin market with branded Sotret. Cipher is entitled to receive a mid-teens royalty on sales of CIP-Isotretinoin at Ranbaxy, along with the potential for $19 million in milestones ($9 million upon approval and two $5 million cumulative sales related) with roughly 50% economics to Cipher after it pays the sub-royalty to Galephar.

Keep Risks In Mind

Approval of CIP-Isotretinoin is paramount to our investment thesis. The application is not without risks however. The U.S. FDA has rejected Cipher s NDA on CIP-Isotretinoin twice in the past five years. The second letter called for Cipher to conduct a phase 3 safety trial, which Cipher completed and presented data on in June 2011. We discuss the results of the phase 3 trial in our report. The FDA ruling on or around May 29, 2012 remains the single biggest risk to owning the stock.

DCF Model Shows Fair-Value at $2.25

We have conducted a discounted cash flow (DCF) analysis to value the shares of Cipher Pharmaceuticals Inc. Above we note that our NPV / Sum-of-Parts analysis for the cash flow from Lipofen and ConZip / Durela alone shows a market value of $23.8 million. However, this is just to give investors a sense of the downside to the Cipher story. At today s value, the stock is trading on the present value of these cash flows. We see little downside in the stock price as long as Lipofen and ConZip / Durela meet our forecasts.

Upside comes with the approval of CIP-Isotretinoin. Cipher will receive a net $4.5 million cash payment from Ranbaxy if the U.S. FDA approves CIP-Isotretinoin. Our model (posted below) shows that operating cash flow should turn positive immediately after the approval of CIP-Isotretinoin. That means that by the end of 2012, Cipher could be collecting revenues from three approved products in the U.S., with a growing cash balance of over $10 million in the bank, and generating positive cash flow. We think that this presents the clear opportunity to in-licenses yet another 505(b)(2)-like product for late-stage development and commercialization in 2013.

We would be buyers of Cipher s stock today, ahead of what we see as a transformational 2012 coming with the potential approval of CIP-Isotretinoin. Our rating is Outperform .


INVESTMENT OVERVIEW

Cipher Pharmaceuticals is a specialty pharmaceutical company that develops improved formulations of existing drugs. Management searches for products in defined markets to in-license into the pipeline. These products are based on currently marketed molecules paired with a novel drug delivery technology for enhanced performance. The core competency is identifying these product opportunities and managing their clinical and regulatory development. Finally, Cipher harvests the rewards by out-licensing to international partners and generating royalty streams. Because Cipher's products are based on proven technology platforms applied to currently marketed drugs, they are expected to have lower approval risk, shorter development timelines and significantly lower development costs. Cipher has made strong progress on this front since the company was founded in 2000 and went public in 2004. Management has in-licensed three products and successfully achieved U.S. FDA approvals for two products, while the third has completed its final phase 3 safety trial and is under U.S. FDA review. Cipher is currently pursuing regulatory approval in other markets for its three current products.

Business Model Focused on Risk / Return

Cipher s goal is to identify known molecules with an established safety and efficacy record that may benefit from enhanced drug delivery technologies. The goal is to produce novel proprietary formulations with low development and regulatory risk that offer advantages to patients.

The company seeks to develop products through the clinical and regulatory stages using a flexible resource model focused on in-licensing known molecules which results in an abbreviated regulatory path and lower costs. This includes drawing on both internal and external expertise and experience, and then crafting a clinical and regulatory strategy to manage risk through development and approval. Cipher looks to in-license candidates when they are early-stage, often preclinical, when they are the least expensive, and then out-licenses for commercialization, in return for upfront payments, milestones, and royalties on sales. The strategy is designed to capture a handsome return on assets with low capital out-lays and risk.

We are fans of the company s model. While drug delivery companies typically do not obtain the market multiple of more traditional high-risk biotechnology models, things like lifecycle management and drug reformulation offer far more predictable returns. Plus, the market for Cipher is rather large. Over two-thirds of all New Drug Applications (NDAs) approved by the U.S. FDA are reformulations or enhanced delivery applications. Larger pharmaceutical companies are beginning to spend more time and effort on lifecycle management, which presents an opportunity for Cipher to continue to find partnership opportunities in the coming years.


Licensed Technology

Cipher has an exclusive license for three products based on two proprietary drug delivery technologies from Galephar Pharmaceutical Research, Inc. ( Galephar ), a Puerto Rico based company with oral and pulmonary drug delivery technology, formulation, manufacturing and quality control expertise. The two proprietary and patent-protected drug delivery technologies are:

1. Oral Lidose Technology: An oral semi-liquid capsule drug delivery technology in which the active ingredients are incorporated in semi-solid or liquid compositions, contained in capsules. Galephar designed the system to facilitate low manufacturing costs, while delivering super-bioavailability for relatively water-insoluble compounds. Cipher utilizes this technology for Lipofen (CIP-Fenofibrate) and CIP-Isotretinoin.

2. Oral Controlled-Release Bead Technology: A multiple particle controlled-release capsule (MPCRC) technology based on unique extrusion and spheronization methods which produces beads containing up to 80% active ingredient. Each coated bead is a controlled release system in itself, designed to provide a smooth consistent plasma levels over an extended period of time. The system is virtually pH-independent, enabling the product to be taken with or without food. Cipher utilizes the MPCRC technology for its U.S. ConZip and Canadian Durela (CIP-Tramadol-ER) product.

After recovering direct product related expenses, and following recovery of investment in Galephar s preferred shares, Cipher pays Galephar a 50% share of all revenue generated from products which utilize either the Lidose or MPCRC technology. The net revenues to Cipher are reported in the company s revenue line.

Lipofen (CIP-Fenofibrate)

Lipofen is a novel, patented formulation of the active ingredient fenofibrate, which is used in the treatment of hypercholesterolemia or mixed dyslipidemia. These include high levels of low-density lipoprotein (LDL) cholesterol and/or triglycerides (TG). The build-up off cholesterol and triglycerides along the walls of the arteries is a process called atherosclerosis. Atherosclerosis decreases the blood flow and, therefore, the oxygen supply to the heart, brain, and other parts of the body. This increases the risk of angina (chest pain), strokes, and heart attacks. Fenofibrate has been shown to decrease level of LDL cholesterol and triglycerides and increase high-density lipoprotein (HDL), also known as good cholesterol by speeding the natural processes that remove cholesterol from the body.

Lipofen is indicated as adjunctive therapy to diet to reduce elevated LDL, triglycerides (TG), and Apo-B, and to increase HDL in adult patients with hypercholesterolemia or mixed dyslipidemia.

Unique Formulation

As noted above, Lipofen utilizes Galephar s Lidose oral semi-liquid capsule drug delivery technology. The technology facilitates a precise, consistent, and uniform dosage of fenofibrate. The unique melt-matrix system removes dependence on particles to allow for rapid absorption following ingestion. The benefits of Lipofen include once-daily dosing (20 hour half-life) and high bioavailability when incorporated into high-fat meals (vs. low-fat meals) compared to generic fenofibrate.

Improved Formulation & Dosing

Leads To Better Bioavailability


Bioequivalent Efficacy

The effects of fenofibrate were assessed during 4 multicenter clinical trials over the course of 3 to 6 months, with a dose equivalent to 150 mg per day of Lipofen. There were 361 patients in the fenofibrate group. Across all 4 studies, patients had the following mean baseline lipid values: total-C 306.9 mg/dL; LDL-C 213.8 mg/dL; HDL-C 52.3 mg/dL; and triglycerides 191.0 mg/dL. The data show fenofibrate demonstrated triglyceride reductions of up to 36%, with LDL lowering up to 31% and HDL elevating up to 15%.

In a subset of the subjects, measurements of Apo-B were conducted. Fenofibrate treatment significantly reduced Apo-B from baseline to endpoint as compared with placebo -25.1% vs. 2.4% (p<0.0001).

Large Market Opportunity

Lipofen targets the large and growing market of cholesterol management. Over 70 million Americans are characterized as having high triglycerides (> 150mg/dL). Over 40 million have triglycerides levels greater than 200mg/dL. The prescription hyperlipidemia market in the U.S. exceeds $20 billion and is made up of four primary groups of drugs: statins, fibrates, prescription DHA/EPA (fish oil), and the prescription niacin market. Use of fenofibrate has grown in recent years, totaling nearly $2.3 billion in 2010, up 4% from 2009. Prescriptions for fenofibrate products increased nearly 6% in 2010 (per IMS Health) to over 18.5 million annually.

Besides Lipofen, fenofibrate is sold in the U.S. under the brand name TriCor and TriLipix by Abbott Labs, Lofibra by Teva Pharmaceuticals USA, and Antara by Lupin Pharmaceuticals, Inc. Lipofen had about 1.1% market share based on total scripts in 2010 (about 208K), and 0.9% based on total sales (about $21 million).

A $2.3 Billion Rx Market

Marketed By Kowa

Cipher received final FDA approval for Lipofen in January 2006. The approval included three unique fenofibrate dosages: 50 mg, 100 mg and 150 mg, with the 150 mg strength equivalent to Abbott s Tricor 160 mg under fed conditions. One month later, Health Canada approved the drug for sale in Canada. During the second quarter 2006, Cipher received notice that the Canadian patent application for CIP-Fenofibrate had been allowed. In July 2007, Cipher entered into a licensing and distribution agreement with ProEthic Pharmaceuticals Inc. under which ProEthic was granted the exclusive right to market, sell and distribute Lipofen in the U.S.


In late 2007, Lipofen was launched in the U.S. market. In September 2008, Kowa Company, Ltd. of Nagoya, Japan acquired ProEthic and changed its name to Kowa Pharmaceuticals America, Inc. (KPA). Cipher received $2 million (USD) from ProEthic in July 2007 for the rights to Lipofen. The deal also included $20 million in potential sales-related milestones. We note that Cipher earned a $1 million cumulative net sales milestone from KPA in the second quarter 2010.

There is one additional $1M (USD) milestone we believe Cipher can earn in the next year or two, and that is when cumulative trailing twelve month (TTM) sales eclipse $25 million. The best TTM period to date was just over $24 million. TTM from November 2010 through October 2011 totaled $22.7 million. We expect that Cipher will record this milestone in 2012 or 2013. Cipher will keep 50% and pay the other 50% to Galephar.

Cipher also receives a royalty on a percentage of net sales, which escalates from the mid-teens to mid-twenties based on annual sales achieved and the level of promotional effort by KPA. The royalty rate is currently 15%. Upon achievement of $25M within a contract year (end September 30th) as discussed above, the rate jumps to 18%. These receipts, along with mark-ups on cost of goods sold, are reflected in Cipher s net revenue, which also incorporate direct product-related expenses and amounts due to Galephar. Management estimates that, after product-related expenses are deducted, approximately 50% of all net revenue received by Cipher under the agreement will be paid to Galephar.

Steady Royalty Growth

Monthly prescriptions have shown steady growth since first launched in 2007. KPA has worked to increase coverage of the primary care physicians in its targeted regions and expand its sales force to promote the product. KPA s sales force has grown to approximately 250 reps to support the launch of their complementary product, Livalo (pitavastatin), in the third quarter 2010. KPA continues to market Lipofen, only now it is detailed in second position (after Livalo) to U.S. physicians. We expect this will continue to the patent expiration in the first quarter of 2015. We note the original deal with ProEthic in 2007 was signed for ten years.

Revenues recorded by Cipher on Lipofen totaled around $5.0 million in 2010, which included amortization of the upfront payment and full recognition of the $1.0 million sales-related milestone in the second quarter 2010. Cipher has fully recognized the upfront payment as of the end of the fourth quarter 2010, so total recorded revenues in 2011 are down year-over-year.

However, we note that royalties on sales of Lipofen at KPA are still increasing, growing at just under $0.1 million in the third quarter 2011. We expect that net Lipofen revenues for the full year 2011 will total about $2.3 million. We forecast this number will grow slightly in 2012 and beyond, up to $3.0 million in 2014 when the patent expires.

Source: Cipher Pharmaceuticals Inc

Using a similar net present value (NPV) on the future cash flows associated with Lipofen, which we note assume no additional sales-related milestones, we believe the Lipofen product is worth approximately $7.1 million in value (using an aggressive 15% discount rate).

Lipofen 10-Year Cash Flow Model


ConZip (CIP-Tramadol-ER)

Tramadol is a centrally active synthetic opioid analgesic that has found a wide range of use since first approved in the late 1970s. The drug is a synthetic analog of the phenanthrene alkaloid codeine, and is used similarly in applications of moderate to moderately severe pain.

In addition, the molecule possesses weak agonist actions at the -opioid receptor, releases serotonin, and inhibits the reuptake of norepinephrine. The NMDA-antagonism and activity around SNRI facilitates use in alleviating symptoms of pain associated with depression and anxiety. Tramadol is also used off-label to treat fibromyalgia and restless leg syndrome (RLS), so much so that the U.S. FDA issued a Warning Letter to Johnson & Johnson, the manufacturer of Ultram (tramadol hydrochloride), in May 2009 alleging that promotional websites were overstating the efficacy and minimizing the serious risk of the drug.

Tramadol does have addictive properties; albeit far lower than more powerful opioid analgesics like fentanyl and oxycodone. Use is associated with the development of physical dependence and a severe withdrawal syndrome. Tramadol causes typical opiate-like withdrawal symptoms as well as atypical withdrawal symptoms including seizures most likely related to the drug's effect on serotonin and norepinephrine re-uptake. That said, the dependence liability is generally considered relatively low by health authorities, such that tramadol is not currently scheduled by the U.S. DEA, unlike most opioid analgesics.

Improved Formulation & Absorption

Tramadol is widely available as a generic tablet (50mg to 300mg). It is also available in combination with acetaminophen and aspirin. Several formulations of tramadol exist, including capsules (regular and extended release), tablets (regular, extended release, chewable, sublingual, effervescent, suppositories), sterile solutions, injections, powders, topical (liquid with or without alcohol).

Cipher s CIP-Tramadol-ER is a novel, extended-release formulation of the active ingredient tramadol used for the management of moderate to moderately severe pain. The drug utilizes Galephar s oral controlled-release bead technology that employs a multiple particle controlled-release capsule (MPCRC) based on unique extrusion and spheronization methods. The formulation is designed to provide a smooth consistent plasma level over an extended period of time. Absorption is pH-independent, enabling the product to be taken with or without food a key differentiator to generic tramadol ER. CIP-Tramadol-ER also provides remarkably fast absorption, allowing for peak therapeutic plasma concentrations to be achieved in as little as 60 minutes again superior to generic tramadol ER.

Superior Dosing

Superior Pharmacokinetics

Niche Opportunity

Tramadol is one of the most widely-used opioid analgesics for moderate pain. According to IMS, the U.S. market for extended release formulations of tramadol was approximately $163 million in 2010, which represents half of the dollar sales for total Tramadol sales in the U.S. in 2010 at $326 million. However, these sales are being generated by only a fraction of the scripts. The total tramadol market exceeded 30.5 million prescriptions in 2010, up 8% year-over-year from the 28.3 million scripts in 2009. Scripts for extended release formulations of Tramadol totaled 1.05 million in 2010, accounting for only 3.5% of the total scripts. Sales are being driven by the few branded and promoted Tramadol-ER products, J&J / Valeant s Ultram-ER and Purdue Pharma s Ryzolt. Branded Ultram-ER sales in 2010 were approximately $66 million. Ryzolt sales totaled $18 million in 2010.


A $200 Million Rx Opportunity

IP Issues Resolved

In May 2010, Cipher received final approval from the U.S. FDA for CIP-Tramadol-ER. Five months later, the U.S. PTO issued a patent for the drug. This was positive news for Cipher following a back-and-forth legal battle on the drugs intellectual property. In the third quarter 2009, Cipher filed a Paragraph IV Certification for CIP-Tramadol-ER with the FDA, which stated that the relevant patents listed in the FDA s Orange Book for Ultram-ER were invalid, unenforceable, and/or will not be infringed by the manufacture or sale of Cipher s drug product. In November 2009, Purdue Pharma and Napp Pharmaceutical Group filed a complaint against Cipher in the U.S. District Court for the Eastern District of Virginia, for alleged infringement of two U.S. patents. In December 2009, Cipher received a favorable judgment in relation to patent litigation with Purdue and Napp Pharma from the Eastern District Court. We expect ConZip to maintain patent protection into 2022.

U.S. Launch Just Getting Underway

In July 2011, Cipher announced that it had entered into a distribution and supply agreement with Vertical Pharmaceuticals, Inc., under which Cipher has granted Vertical the exclusive right to market, sell and distribute CIP-Tramadol-ER in the U.S. Vertical Pharmaceutical is a privately-owned, U.S.-based specialty pharmaceutical company focused on niche prescription drug preparations in the area of pain management, primary care, internal medicine and women's health. We expect primary position detailing for the next six to eight quarters.

Under the terms of the agreement with Vertical, Cipher received an initial upfront and launch payment of $1.5 million (USD). Cipher is also eligible to receive future payments of approximately $4.0 million contingent upon the achievement of certain sales milestones. In addition, Cipher will receive a royalty on net sales in the mid-teens. Cipher is responsible for product supply and manufacturing, which will be fulfilled by its partner, Galephar Pharmaceutical Research.

Vertical officially launched the product in September 2011 under the brand name ConZip. Vertical has dedicated an initial sales force of 60 representatives, with plans for further expansion in the first half of 2012. We are expecting roughly $0.55 million in sales in the fourth quarter 2011.

Canadian Launch Expected Shortly

In August 2011, Cipher received final approval from Health Canada on CIP-Tramadol-ER. A month later, Cipher announced that it had entered into a distribution and supply agreement with Medical Futures Inc., a Canadian-based pharmaceutical company, for the exclusive right to market, sell, and distribute CIP-Tramadol-ER in Canada under the brand name Durela. Medical Futures will add Durela to its suite of specialty pharmaceutical products, including Onypen (topical nail fungus), Iberogast (anti-inflammatory agent), Proferrin (iron supplement), and Mutaflor, Florastor and Purfem (probiotics).

Under the terms of the agreement with Medical Futures, Cipher received an upfront payment of $0.3 million (CAD). Cipher is also eligible to receive future payments contingent upon the achievement of cumulative net sales milestones. In addition, Cipher will receive a double-digit royalty on net sales Cipher is responsible for product supply and manufacturing, which will be fulfilled by its partner, Galephar Pharmaceutical Research. Medical Futures plans to launch Durela in first quarter 2012 with a dedicated primary care sales force of approximately 22 representatives with plans for further expansion.


Expected Cash Flow

The ConZip launch is early, but we expect that peak sales in the U.S. will be around approximately $25 million. As noted above, Cipher is entitled to a mid-teen royalty and can earn up to an additional $4 million (USD) in milestones. For the purpose of our model, we are assuming 15% royalty on sales with Cipher keeping around 60% net after manufacturing and sub-royalties to Galephar. We model achievement of half of the back-end milestones, totaling $2 million between now and 2018. We see peak sales of Durela at $5 million in Canada, with a similar 15-20% gross royalty netting about 60% to Cipher. Below are our cash flow assumptions to Cipher on U.S. and Canadian sales of CIP-Tramadol-ER.

CIP-Isotretinoin

Isotretinoin is a retinoid (derivative from vitamin A) originally developed as a treatment for cancer and harlequin-type ichthyosis, a lethal skin disease characterized by the thickening of the keratin layer in fetal human skin. However, it is now most commonly used for the treatment of severe cystic acne vulgaris (acne) when topical medications such as benzoyl peroxide or oral antibiotics fail. Severe cystic acne is an extremely disfiguring condition caused by a chronic oil and gland disorder. The condition is marked by tremendous pus filled lesions which typically spread across the entire face and neck leaving behind pitted permanent scars. Besides the obvious physical consequences, it can cause psychological ramifications such as poor self-image, social inhibition, depression and anxiety.

Serious Side Effects

Isotretinoin is a highly effective treatment for severe cystic acne. The drug was first commercialized in the U.S. in 1982 for the treatment of acne by Hoffman-La Roche as Accutane. Clinical studies demonstrated powerful efficacy, unmatched by any previous treatment. Roughly 85% of patients who take Accutane achieve full remission after a typical course of treatment (about five months). The drug achieved peak U.S. sales of over $750 million in 2000. Globally, Accutane achieved peak sales over $1.2 billion.

Unfortunately, Isotretinoin has been known to cause serious side-effects, most notably birth defects when used by pregnant women. About 40% of all pregnant women exposed to Isotretinoin have spontaneously miscarried. What s worse, data shows that about one quarter of babies born who have been exposed to Accutane during gestation have major congenital deformities. And, those babies born without major malformations frequently develop severe learning disabilities. It is among the most dangerous drugs that can be used by pregnant women.

Accordingly, prescriptions are closely monitored by the U.S. FDA. Accutane was subject to a Public Citizen petitioned in 1983 requesting the FDA adjust the Accutane label to cite the drugs significant risks. In 1984, Roche complied with the FDA s requests and strengthened the Accutane warning label, and in 1985 the Public Citizen Petition warning was included on the label. Between 1984 and 1988 Roche delivered eight Dear Doctor letters warning about Accutane. Unfortunately, many pregnant women continued to use the drug despite the warnings from both the FDA and Roche. In 2001, Roche cited nearly 2000 cases of pregnant women exposed to Accutane. Finally, in October 2001, FDA revealed SMART (the System to Manage Accutane Related Teratogenicity). The program took effect in April 2002, and requires prescribers to participate in the SMART Guide to Best Practices in an effort to prevent Accutane fetal exposure.

SMART required two consecutive negative pregnancy tests among women of childbearing potential before a prescription for Isotretinoin can be written. SMART was terribly ineffective. In 2003, the number of prescriptions reported in pregnant women actually increased from 2002. The U.S. FDA came back in March 2006 with a superior program called iPLEDGE, a mandatory distribution program intended to prevent the use of the drug in women who are currently pregnant or may become pregnant during use. It has been moderately more effective.


Roche s patent expired on Isotretinoin in 2002. In June 2009, Roche discontinued sales in the U.S. due to low market share versus generic equivalents. However, generic manufacturers must still comply with the iPLEDGE program. Because of this, traditional generics do not exist. Instead, companies have launched version of their own branded Isotretinoin to help cover the cost of the added surveillance and iPLEDGE program. Sotret (Ranbaxy), Claravis (Teva), and Amnesteem (Mylan) are currently available in the U.S. These products are AB rated for Accutane.

Prescriptions are still closely monitored by the U.S. FDA. Other serious side-effects have potentially been associated with the drug have been discovered, including serious gastrointestinal effects, including inflammatory bowel disease, ulcerative colitis, Crohn s disease, rectal bleeding, and abdominal pain. Despite these side effects, the drug remains in high demand due to its powerful efficacy in treating nodular acne.

Formulation

Cipher s CIP-Isotretinoin is based on the same oral Lidose drug delivery system used with CIP-Fenofibrate. As noted above, Lidose facilitates a precise, consistent, and uniform dosage delivery with an absorption characteristic consistent with or without food versus traditional generic Isotretinoin. A major issue for existing isotretinoin products is patient compliance, as the active ingredient should be taken with a high-fat meal to ensure consistent absorption. Current generic Isotretinoin products have an estimated 70% variability in absorption depending on dietary intake causing inconsistency in dose a major issue when dealing with teenagers.

Cipher s product offers more consistent absorption day-in and day-out over the course of a typical 3- to 5-month treatment period. We think this will be a significant marketing advantage for Cipher upon launch. There are currently no promoted branded Isotretinoin products in the U.S. The three branded products listed above rely on previous patient and physician experience with the product to drive sales. The efficacy profile of Isotretinoin is powerful enough that nearly 1.1 million prescriptions were written in 2010. All three products discussed above exhibit significant reductions in absorption under fasting conditions. In total, Isotretinoin products, posted sales of $466 million in 2010, up over 10% from 2009.

CIP-Isotretinoin Offers Consistent Absorption

During Fed

And Fast Conditions


Addressing FDA Concerns

Cipher originally filed for approval of CIP-Isotretinoin in the second quarter 2005 as a 505(b)(2) application. Unfortunately, the company received an approvable letter from the FDA in May 2006. In the letter, the FDA requested that Cipher provide additional clinical data and further details relating to chemistry, manufacturing and controls (CMC) for the product. Cipher submitted its response to the approvable letter in October 2006, which was accepted by the FDA in January 2007 as complete. The FDA designated the filing as a Class-2 response and established a Prescription Drug User Fee Act (PDUFA) of April 27, 2007. Unfortunately, Cipher s second attempt at gaining approval for CIP-Isotretinoin was met with another approvable letter.

This time the FDA indicated that Cipher s application was approvable subject to the resolution of two requests. Firstly, the FDA had lingering issues with respect to the CMC of the product. In 2008, Cipher stated it believed it had answered and resolved the FDA s questions around the CMC for CIP-Isotretinoin. Secondly, the FDA requested the company provide additional safety data prior to approval. Cipher attempted to appeal the decision with the FDA, but following a meeting with the agency in July 2007, it became evident that a phase 3 safety trial was necessary before the drug would be allowed on the market in the U.S. Based on what we have been able to pull from the public records and our conversations with management, it looks like the FDA is using Cipher s NDA on CIP-Isotretinoin to fill in significant holes mostly safety concerns on generic Isotretinoin. This is not the first time we have seen the FDA ask a reformulation 505(2)(b) applicant conduct significantly more work than what the original applicant had to submit for approval. After all, Roche filed the NDA for Accutane in 1982. Since that time significant questions have been raised about the drugs side effects and safety profile. Cipher got stuck tying up those loose-ends.

Nevertheless, Cipher began working closely with the U.S. FDA on the design of a phase 3 safety trial in 2008. During the second quarter 2009, Cipher finalized the study protocol under a Special Protocol Assessment (SPA) with the FDA. Management enrolled the first patient in the trial in October 2009. The phase 3 safety study was double-blind, randomized trial comparing CIP-Isotretinoin to an FDA-approved, commercially available generic isotretinoin product in over 900 patients. The study was conducted at over 50 sites in both the U.S. and Canada over an 18-month period. The trial completed enrollment in October 2010 at 925 patients.

The primary endpoint of the trial was safety. The FDA asked Cipher to look into all potential adverse events that had been associated with Isotretinoin over the past two decades the drug was on the market. This included potential psychiatric side effects like depression and suicidal thoughts, effects on hearing and vision, dry skin, and changes in bone mineral density and fractures. It was a comprehensive safety and pharmacokinetic analysis.

Cipher released top-line data from the trial in June 2011. Of the 925 patients who enrolled in the study, 813 patients completed the 20-week trial. As per the protocol, subjects were directed to always take Isotretinoin with meals. Data from the trial revealed no overall statistical differences in the adverse event profile between the two products. The most frequent side effects that were observed were dry skin and dry lips. In addition, initial statistics on psychiatric disorders, eye disorders, ear disorders, musculoskeletal, vascular disorders, cardiac disorders, and gastrointestinal disorders, illustrate there are no significant differences in the extent of adverse events between Cipher s CIP-Isotretinoin and the reference product. Population pharmacokinetic data showed no statistical difference between the two products (AUC / CMAX) they were equivalent when taken with food (per the proposed label).

Because the phase 3 trial enrolled patients with active acne, there was an efficacy component. Cipher established two co-primary efficacy endpoints: 1) the total change in lesion counts between baseline and at the end of week 20; and 2) the total number of subjects that had at least a 90% clearing at the end of 20 weeks of treatment. These two co-primary endpoints were analyzed using a per-protocol population (PP) and intent-to-treat (ITT) analysis. Analysis of the efficacy was based on non-inferiority (at 90% powering) with a range of +/- 10% between CIP-Isotretinoin and the reference product.

The PP analysis comprised all subjects who completed the study according to the protocol. That includes taking both drugs for the full 20 weeks, and showing up for all safety analyses and follow-up visits. In this analysis both co-primary endpoints met the non-inferiority margins established for the study.

The ITT population comprised all subjects who entered the study, including those who did not conclude the study for whatever reason. Those who dropped out early were assigned treatment efficacy scores based on the last observation recorded for that subject, also known as last observation carried forward (LOCF). In the LOCF analysis of the ITT population, the first primary endpoint (total change in lesion count) was achieved while the second endpoint (at least 90% clearing) fell slightly outside the non-inferiority target margin. In fact, the results were less than 0.5% from meeting statistical non-inferiority.


Efficacy Analysis Non-Inferior to generic Isotretinoin

Safety

Analysis PP ITT-LOCF

Lesion Count (Week-20)

90% Clearing (Week-20)

Management has gone back and conducted further analysis of the ITT-LOCF population. Given the identical pharmacokinetic data between CIP-Isotretinoin and the generic Isotretinoin, we believe the cause of the missed endpoint in the 90% clearing ITT-LOCF can be associated to random chance (10%) or outliers in the ITT population due to protocol violators. We remind investors that this was a rigorous safety program that required blood work for the PK analysis, X-rays for the bone density analysis, skin tests, vision tests, hearing tests, cardiovascular tests, and extensive psychological tests over a 5 month timeframe. The majority of the population in the study was teenagers. Of the 925 enrolled, only 813 completed to week 20. The PP population was even less. According to management, there were no statistical differences in adverse events or drop-out rates between the two arms.

We fully acknowledge that this issue remains the single biggest wildcard for Cipher heading into the U.S. PDUFA. However, we believe the pharmacokinetic data proves that CIP-Isotretinoin is identical to generic Isotretinoin. The FDA has accepted this type of PK / bioequivalency data in the past on reformulation applications. The FDA s CRL was based on filling in gaps on the Isotretinoin safety profile. We do not believe that the missed 90% clearing endpoint by less than 0.5% on the ITT-LOCF will hold up approval.

Big Opportunity

Cipher filed a new drug application (NDA) with the U.S. FDA in late November 2011 for the 10mg, 20mg, and 30mg dose. The NDA for the 40mg dose was filed in 2010. As noted above, management believes it has addressed the CMC and safety issues outlined in the second approvable letter from April 2007. The FDA accepted the application and established a PDUFDA date of May 29, 2012. We remind investors that during the fourth quarter 2008, Cipher was issued a patent by the U.S. Patent and Trademark Office (USPTO) for CIP-Isotretinoin. The patent includes claims related to the reduced food effect of CIP-Isotretinoin relative to currently marketed formulation, and should protect the product into 2022.

Despite strict FDA monitoring around prescriptions of Isotretinoin, the market remains quite robust. Generic (multiple providers) Isotretinoin does around $500 million in sales in the U.S., and that is with no promotion. Prescriptions have remained fairly consistent over the past few years, perhaps trending down slightly since late 2009 once Roche exited promoting Accutane. We estimate that in terms of a branded opportunity, the Isotretinoin market is nearly $1 billion in size. We remind investors that Roche had Accutane sales over $750 million at peak. We believe that Cipher s CIP-Isotretinoin product, being the only promoted branded Isotretinoin on the market, could achieve peak sales in the $150-200 million range.

The market is currently dominated by two un-promoted branded products, Mylan s Amnesteem and Teva s Claravis. Amnesteem posted sales of $136 million in 2010 on 386K scripts. Claravis posted sales of $330 million in 2010 on 670K scripts.

Ranbaxy To Commercialize

Cipher s marketing rights to CIP-Isotretinoin include the Americas and a majority of the Pacific Rim. In August 2008, the company entered into a distribution and supply agreement with Ranbaxy Pharmaceuticals Inc., under which Cipher granted Ranbaxy the exclusive right to market, sell and distribute CIP-Isotretinoin in the U.S. We think this is an interesting partnership for Cipher considering Ranbaxy has experience in the Isotretinoin market already with Sotret. We note that in 2009, Ranbaxy had to recall a single lot of Sotret when the FDA issued a Class-III warning on manufacturing, citing deviations from good manufacturing practice (GMP) at the company s plant in India. Sotret achieved annual sales of $41 million in the U.S. in 2009. Sales were triple that in 2008 prior to the recall.


Under the terms of the agreement with Ranbaxy, Cipher received an initial upfront payment of $1 million (USD). Ranbaxy also agreed to fund the bulk of the recently completed phase 3 safety program. With respect to that program, Cipher has received two additional milestones associated with the trials progress $2 million (USD) in April 2010 for achieving 50% enrollment and $1 million (USD) in December 2010 for filing the NDA. We expect that Cipher will receive $1 million in the fourth quarter 2011 for the filing and acceptance of the U.S. NDA.

The agreement provides for additional pre- and post-commercialization milestone payments of up to $19 million (USD). These milestones include $9 million for U.S. FDA approval and $10 million for cumulative sales thresholds, payable in the form of two $5 million milestones. Through conversations with management, we believe the two $5 million in sales-related milestones are achievable under the current expected plans with Ranbaxy. Ranbaxy is committed to a dedicated a 60-person sales force and to promote CIP-Isotretinoin in the primary position for a minimum of three years.

Cipher is also entitled to receive a royalty in the mid-teens on net sales. Any additional development costs associated with pre FDA approval will be shared equally. Cipher is responsible for product supply and manufacturing, which would be fulfilled by its partner, Galephar. We expect similar economics between Cipher and Galephar on CIP-Isotretinoin to the two previous deals for CIP-Fenofibrate and CIP-Tramadol-ER.

Canadian Opportunity

Cipher has submitted an application to Health Canada. Management is in discussion with potential partners for launch in Canada following approval. However, we note on the third quarter conference call that management hinted at the potential of launching CIP-Isotretinoin in Canada on its own. We view CIP-Isotretinoin as a potential $10 million opportunity in Canada. The total Isotretinoin market is Canada is small, only around $20 million total. Only two products, Roche s Accutane and Mylan s Clarus are on the market, with little to no promotion. Therefore, we believe that a sales force of 6 to 8 representatives could effectively promote the product in-house. Given that the application was filed late last year, we would expect Health Canada to rule on the approval of CIP-Isotretinoin in Canada in mid-2013.

Expected Cash Flow

As noted above, Ranbaxy is an interesting partner for Cipher. We expect that Ranbaxy, up until recently a major player in the Isotretinoin market with Sotret, will actively look to convert its previous business over Cipher s superior CIP-Isotretinoin product. As a reminder, Sotret was doing over $120 million in 2008 before the recall on QC/GMP issues out of the India manufacturing facility. It s a little different market now than then because Accutane is gone and promotion has dried up, but with the added benefit of flexible dosing with respect to food (more consistent absorption under fed / fast conditions), and premium pricing, we believe that Ranbaxy will be able to achieve peak sales in the U.S. of $175 million.

For the purpose of our model, we are assuming 15% royalty on sales with Cipher keeping around 60% net after manufacturing and sub-royalties to Galephar. We model recognition of half of the back-end milestones, totaling $9.5 million (net to Cipher) between now and 2021. For the purpose of CIP-Isotretinoin in Canada, we see peak sales of at $7.5 million in Canada. We assume that Cipher will look to commercialize the product in Canada with its own contract sales force of around 8 full-time representatives. We think CIP-Isotretinoin becomes cash flow positive for Cipher in Canada at sales around $3 million. We think this can be achieved in the third year post-launch.

Below are our cash flow assumptions to Cipher. We assume Cipher market CIP-Isotretinoin in Canada on its own. We see Canadian peak sales of around $7.5 million. Our assumptions in the U.S. assume royalties and milestones from Ranbaxy on U.S. sales.


PIPELINE

Source: Cipher Pharmaceuticals Inc.

VALUATION & RECOMMENDATION

Initiating Coverage

We are initiating coverage of Cipher Pharmaceuticals Inc. with an Outperform rating and $2.25 price target, or a market capitalization of $50 million. Cipher currently trades with a market capitalization of only $16 million. We believe the story is largely de-risked and under-appreciated by the Street. Cipher currently has two revenue streams in place with royalties and milestones on sales of Lipofen (CIP-fenofibrate) at Kowa Pharma in the U.S. and the recently launched ConZip (CIP-tramadol-ER) at Vertical Pharma in the U.S. We expect a third royalty and milestone stream from the launch of Durela (CIP-tramadol-ER) at Medical Futures within the next few months.

We have established what we believe to be conservative forecasts for these revenue streams going forward to patent expiration on each product, Lipofen (Q1-2015) and ConZip/Durela (2022). We remind investors that Cipher has little to no ongoing costs associated with either product. Therefore, the best way to value these revenue streams is through the net present value (NPV) of the cash flows using a 20% discount rate. We believe royalties and milestones on Lipofen are worth approximately $7 million in value. Royalties and milestones on ConZip / Durela are worth another $8 million in value. Finally, we forecast that Cipher will exit 2011 with approximately $9 million in cash and equivalents.

Pre-CIP-Isotretinoin Sum-Of-Parts Value Lipofen (CIP-fenofibrate) $7.1 million

ConZip / Durela (CIP-tramadol-ER) $7.7 million Cash at Year-End 2011 $9.0 million Shares Per Share

Current Value $23.8 million 26.2 million $0.91

CIP-Isotretinoin Offers Big Upside

Based on our model, the stock is currently trading below the net present value of the cash flows from Lipofen and ConZip / Durela, plus the cash on hand. That means investors can purchase the stock today and get the CIP-Isotretinoin product, a potential $200 million opportunity in the U.S., for free. Cipher has licenses the rights to CIP-Isotretinoin to Ranbaxy, a major player in the generic Isotretinoin market with branded Sotret. Sotret posted U.S. sales over $120 million in 2008 prior to the FDA mandating a recall on the product due to quality control / GMP issues at the company s plant in India. We believe that Cipher s CIP-Isotretinoin, with its superior absorption and bioavailability characteristics will move into the primary detail position for Ranbaxy s efforts around Isotretinoin.


Cipher is entitled to receive a mid-teens royalty on sales of CIP-Isotretinoin at Ranbaxy, along with the potential for $19 million in milestones ($9 million upon approval and two $5 million cumulative sales related) with roughly 50% economics to Cipher after it pays the sub-royalty to Galephar.

Cipher becomes a different company with CIP-Isotretinoin on the market in the U.S. By 2016, the royalties on CIP-Isotretinoin alone will account for greater than 80% of the top-line.

We also remind investors that Cipher has filed an application for approval with Health Canada. We estimate the Canadian opportunity with CIP-Isotretinoin is around $10 million, and we expect that Cipher will seek to commercialize the drug on its own through the formation of a small internal sales force of 6 to 8 representatives. We assume Canadian approval in mid-2013.

Keep Risks In Mind

Approval of CIP-Isotretinoin is paramount to our investment thesis. The application is not without risks however. The U.S. FDA has rejected Cipher s NDA on CIP-Isotretinoin twice in the past five years. The second letter called for Cipher to conduct a phase 3 safety trial, which Cipher completed and presented data on in June 2011.

Of the 925 patients who enrolled in the study, 813 patients completed the 20-week trial. The safety data revealed no overall statistical differences in the adverse event profile or the pharmacokinetics between CIP-Isotretinoin and a commercially available generic Isotretinoin product. Unfortunately, the efficacy component offers mixed results. The efficacy component of the study had two co-primary endpoints: 1) the total change in lesion counts between baseline and at the end of week 20; and 2) the total number of subjects that had at least a 90% clearing at the end of 20 weeks of treatment. These two co-primary endpoints were analyzed using the per-protocol population (PP) as well as the intent-to-treat population (ITT) last observation carry forward (LOCF).

In the PP analysis, both co-primary endpoints met the non-inferiority margins established for the study. In the LOCF analysis of the ITT population, the first primary endpoint (total change in lesion count) was achieved while the second endpoint (at least 90% clearing) fell narrowly (less than 0.5%) outside the non-inferiority margin target. However, we do not believe this will be an issue to hold up approval in the U.S. We think the FDA was far more interested in the safety analysis from the trial. The trial was set up as a safety and PK analysis. The FDA has traditionally approved reformulations in the past on PK / bioavailability data alone. Cipher went above and beyond a traditional reformulation application by conducting the extensive safety analysis requested by the agency. However, a missed endpoint presents risk, and this is the single biggest risk to owning the stock ahead of the May 29, 2012 U.S. FDA PDUFA action date.

DCF Model Shows Fair-Value at $2.25

We have conducted a discounted cash flow (DCF) analysis to value the shares of Cipher Pharmaceuticals Inc. Above we note that our NPV / Sum-of-Parts analysis for the cash flow from Lipofen and ConZip / Durela alone shows a market value of $23.8 million. However, this is just to give investors a sense of the downside to the Cipher story. At today s value, the stock is trading on the present value of these cash flows. We see little downside in the stock price as long as Lipofen and ConZip / Durela meet our forecasts.

Upside comes with the approval of CIP-Isotretinoin. Cipher will receive a net $4.5 million cash payment from Ranbaxy if the U.S. FDA approves CIP-Isotretinoin. Our model (posted below) shows that operating cash flow should turn positive immediately after the approval of CIP-Isotretinoin. That means that by the end of 2012, Cipher could be collecting revenues from three approved products in the U.S., with a growing cash balance of over $10 million in the bank, and generating positive cash flow. We think that this presents the clear opportunity to in-licenses yet another 505(b)(2)-like product for late-stage development and commercialization in 2013. We would be buyers of Cipher s stock today, ahead of what we see as a transformational 2012 coming with the potential approval of CIP-Isotretinoin. Our rating is Outperform .


MANAGEMENT

Larry Andrews President and CEO Mr. Andrews is an accomplished senior executive with more than 25 years of experience in the pharmaceutical industry. The former President of AltiMed Pharmaceuticals, Mr. Andrews is also the Founder and President of the Health Alliance Group. Mr. Andrews has played a lead role in the licensing for more than 25 compounds in the Canadian pharmaceutical market and has marketed both innovative and generic products. His career includes senior management assignments with Eli Lilly, Syntex Pharmaceuticals, and Hoffmann-La Roche. He received his Honors BSc degree from Memorial University before joining the pharmaceutical industry.

Norman Evans, C.A. Chief Financial Officer Norman Evans has been the Chief Financial Officer since March 2007. Mr. Evans is a Chartered Accountant with more than 25 years of business experience. Most recently he held the position of Vice-President, Finance at MDS Pharma Services, a division of MDS Inc. Prior to joining MDS, Mr. Evans was a Partner in the Toronto office of Ernst & Young. Mr. Evans has a Bachelor of Science degree from Concordia University in Montreal.

Jason A. Gross, Pharm.D. Vice President, Scientific Affairs Dr. Jason A. Gross joined Cipher in June 2006 as Vice President, Scientific Affairs. Dr. Gross has been in the pharmaceutical industry for more than 14 years, most recently as a Venture Partner and Vice President of Scientific Affairs at MDS Capital Corporation. During his tenure with MDS Capital, Dr. Gross served as interim management of investee companies, coordinated and conducted scientific due diligence, and provided scientific guidance to MDS Capital's investee companies. Previously, Dr. Gross was Vice President of Regulatory Affairs and Quality Assurance for DrugAbuse Sciences. He has also served as the Director of State, Federal and International Regulatory Affairs at Zenith/Goldline Pharmaceuticals, a subsidiary of IVAX Corporation. Prior to his transition into the private sector, he was an officer in the Public Health Service assigned to the U.S. Food and Drug Administration (FDA), Center for Drug Evaluation and Research. He served in various regulatory capacities at the FDA, including Chief Consumer Safety Officer for the Office of Generic Drugs, Division of Bioequivalence, and Manager of the Domestic Pre-approval Inspection Process. Dr. Gross studied marketing and management prior to receiving his Doctor of Pharmacy from the University of Arizona, after which he completed a postdoctoral specialized residency in Ambulatory Care at the National Institutes of Health.

William Garriock Chairman of the Board Mr. Garriock is a professional company director and the retired Chairman and former President of MDS SCIEX, the analytical instrument division of MDS Inc. From 1993 to 1994, Mr. Garriock was Vice President and Managing Partner of MDS Health Ventures Inc., following eighteen years as President and CEO of Miles Canada Inc. (now Bayer Canada Inc.), a pharmaceutical, diagnostics and consumer products company. Mr. Garriock is a graduate of the University of British Columbia and obtained his MBA from Northwestern University, Kellogg School of Business. He currently serves as a director of World Heart Corporation. Mr. Garriock is Cipher s Chairman of the Board of Directors as well as the Chairman of the Nominating and Governance Committee.


PROJECTED FINANCIALS

Cipher Pharmaceuticals Inc. Income Statement

Model in Canadian Dollars (IFRS) 2009 A

2010 A

Q1 A

Q2 A

Q3 A

Q4 E

2011 E

2012 E

2013 E

2014 E

Lipofen Net Revenues $3.1

$5.0

$0.6

$0.6

$0.5

$0.6

$2.3

$3.0

$2.8

$3.0

CIP-Fenofibrate YOY Growth -

61.3%

-

-

-

-

-54.0%

30.4%

-6.7%

7.1%

CIP-Tramadol-ER Net Revenues $0

$0

$0

$0

$0.5

$0.0

$0.5

$0.4

$0.7

$2.1

CIP Tramadol-ER YOY Growth -

-

-

-

-

-

-

-30.2%

100.0%

191.1%

CIP-Isotretinoin Net Revenues $0.1

$0.4

$0.1

$0.1

$0.1

$0.6

$1.4

$1.5

$5.1

$8.1

CIP-Isotretinoin YOY Growth -

300.0%

-

-

-

-

250.0%

8.7%

235.2%

58.8%

Total Revenues

$3.179

$5.385

$0.675

$0.727

$1.120

$1.1

$3.6

$4.9

$8.6

$13.2

YOY Growth -

69.4%

-26.5%

-67.2%

3.6%

-5.8%

-32.7%

34.8%

76.6%

53.1%

Operating, General & Admin $4.252

$3.779

$1.164

$0.610

$0.659

$0.7

$3.1

$3.5

$4.8

$4.8

% SG&A 133.8%

70.2%

172.4%

83.9%

58.8%

63.6%

86.5%

71.7%

55.1%

36.4%

Research & Development $0.956

$0.743

$0.547

$0.578

$0.468

$0.7

$2.3

$1.5

$1.0

$1.0

% R&D 30.1%

13.8%

81.0%

79.5%

41.8%

63.6%

63.3%

30.7%

11.6%

7.6%

Amortization & Depreciation $0.810

$0.757

$0.072

$0.080

$0.242

$0.1

$0.5

$0.5

$0.5

$0.5

Operating Income

($2.839)

$0.106

($1.108)

($0.541)

($0.249)

($0.4)

($2.3)

($0.6)

$2.4

$6.9

Operating Margin -

-

-

-

-

-

-62.9%

-12.7%

27.5%

52.3%

Interest & Other Net $0.124

$0.066

$0.023

$0.020

$0.022

$0.0

$0.1

$0.1

$0.1

$0.1

Pre-Tax Income

($2.715)

$0.172

($1.085)

($0.521)

($0.227)

($0.4)

($2.2)

($0.5)

$2.5

$7.0

Taxes / Other $0

$0

$0

$0

$0

$0

$0

$0

$0

$0

Tax Rate 0%

0%

0%

0%

0%

0%

0%

0%

0%

0%

Net Income

($2.715)

$0.172

($1.085)

($0.521)

($0.227)

($0.4)

($2.2)

($0.5)

$2.5

$7.0

YOY Growth -

-

-

-

-

-

-

-76.4%

-212.6%

-1449.1%

Reported EPS

($0.11)

$0.01

($0.05)

($0.02)

($0.01)

($0.01)

($0.09)

($0.02)

$0.10

$0.27

YOY Growth -

-

-

-

-

-

-

-76.6%

-209.0%

-1396.2%

Shares Outstanding 23.8

24.1

24.1

24.2

24.3

24.3

24.2

24.5

25.0

25.5

Source: Zacks Investment Research, Inc. Jason Napodano, CFA


Cipher Pharmaceuticals Inc. DCF Model


HISTORICAL ZACKS RECOMMENDATIONS

Chart Generated by Yahoo! Inc.

DISCLOSURES

The following disclosures relate to relationships between Zacks Investment Research ( ZIR ) and Zacks Small-Cap Research ( Zacks SCR ) and the issuers covered by the Zacks SCR analysts in the Small-Cap Universe.

ZIR or Zacks SCR Analysts do not hold or trade securities in the issuers which they cover. Each analyst has full discretion on the rating and price target based on their 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 non-investment banking services. 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 blog.

ZIR and Zacks SCR do not make a market in any security nor do they act as dealers in securities. Zacks SCR has never received compensation for investment banking services on the small-cap universe. Zacks SCR does not expect received compensation for investment banking services on the small-cap universe. 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. Non-investment banking services include investor relations services and software, financial database analysis, advertising services, brokerage services, advisory services, investment research, and investment management.

Additional information is available upon request. Zacks SCR reports are based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the 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. Reports are not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks SCR uses the following rating system for the securities it covers. 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 of Zacks Ratings is as follows on the 1051 companies covered: Buy/Outperform- 15.0%, Hold/Neutral- 77.4%, Sell/Underperform

5.7%. Data is as of midnight on the business day immediately prior to this publication.

Documents

market capitalization of $50 million. Cipher currently ... 4, 2012_T.DND_Initaiti… · based on unique extrusion and spheronization methods which produces beads containing up to