Out-Licensing In Eight Territories Will Expand Natroba's Global Footprint

Key Takeaways

• Strategic integration and commercialization in the U.S. will boost sales and margins, enhancing future revenue and earnings.
  
• International market expansion and strategic in-licensing aim to drive growth and improve financial performance.
  
• Increased competition and operational costs, alongside legal and regulatory challenges, could strain Cipher Pharmaceuticals' revenue growth, profitability, and profit margins.

Catalysts

Operates as a specialty pharmaceutical company in Canada.

• The successful integration and direct commercialization of the Natroba business, along with the expanded indication in the U.S. for treating scabies, positions Cipher to increase product sales and expand margins, positively impacting future revenue and earnings.
  
• Exploring international markets for Natroba, with ongoing out-licensing discussions in eight different territories, offers potential for global revenue growth, enhancing the company’s overall financial performance.
  
• The strategy to in-license new dermatology products and pursue acquisitions that complement Cipher's portfolio aims to drive inorganic growth, thereby increasing future revenue and earnings.
  
• Share repurchases under the Normal Course Issuer Bid (NCIB) can serve as an effective capital allocation strategy, potentially increasing earnings per share (EPS) by reducing the number of outstanding shares.
  
• The remaining $154 million in tax loss carryforwards offers a significant tax shield, preserving cash flow and enhancing net income as the company continues to generate profits.

Cipher Pharmaceuticals Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cipher Pharmaceuticals's revenue will grow by 19.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 34.6% today to 32.2% in 3 years time.
• Analysts expect earnings to reach $18.5 million (and earnings per share of $0.7) by about April 2028, up from $11.5 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $20.4 million in earnings, and the most bearish expecting $16.5 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.7x on those 2028 earnings, up from 18.9x today. This future PE is greater than the current PE for the CA Pharmaceuticals industry at 19.3x.
• Analysts expect the number of shares outstanding to grow by 6.23% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.82%, as per the Simply Wall St company report.

Cipher Pharmaceuticals Future Earnings Per Share Growth

Risks

• The decline in licensing revenue, particularly from the Absorica portfolio in the U.S., due to increased generic competition and lower partner shipments, could impact overall revenue growth and profitability.
  
• The significant decrease in Absorica's market share from 6.9% to 6% by the end of 2024 highlights heightened competition, which can further pressure revenue and net margins.
  
• The expenses incurred from the acquisition, restructuring, and increased operational costs related to the Natroba business led to higher selling, general, and administrative expenses, potentially straining net earnings and impacting profit margins.
  
• Legal costs related to contractual disputes and ongoing arbitration processes contribute to increased SG&A expenses, potentially impacting net income.
  
• Potential risks surrounding the approval and commercialization of Natroba in international markets, such as regulatory challenges and the establishment of distribution agreements, could affect future revenue streams and growth prospects if not managed successfully.

Valuation

• The analysts have a consensus price target of CA$15.65 for Cipher Pharmaceuticals based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$18.6, and the most bearish reporting a price target of just CA$12.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $57.4 million, earnings will come to $18.5 million, and it would be trading on a PE ratio of 21.7x, assuming you use a discount rate of 5.8%.
• Given the current share price of CA$11.81, the analyst price target of CA$15.65 is 24.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.