I first wrote about Cipher here: https://boolefund.com/case-study-cipher-pharmaceuticals-cphrf/
Since then, the stock price has gone from $2.83 to $6.35, an increase of over 120%. However, the stock still appears quite undervalued, so it’s worth revisiting the investment thesis.
Cipher Pharmaceuticals is an extremely profitable pharmaceutical company based in Canada. Its main product Epirus (the active ingredient is isotretinoin), which cures nodular acne, has been gaining market share steadily in the Canadian market because it is far the best product. The drug does not have a patent, but it would take a competitor at least $30 million to develop a competing product in Canada. Epirus currently has 45% of the Canadian market and is aiming for 65%.
Cipher also earns $6 million in royalty revenue from another isotretinoin product–Absorica–in the United States.
Furthermore, Cipher has the Canadian marketing rights to MOB-015, which cures nail fungus (onychomycosis). The drug is already approved in Europe. It should be approved in North America by January 2025 and available to customers in January 2026. The addressable market for MOB-015 in Canada is CDN $92.4 million. The company expects $15 million in revenue from MOB-015 in 2026 and $30 million in revenue in 2027. The current product in this market is not very good and MOB-015 is expected to be much better.
Cipher expects revenues to triple by 2027 as Epirus keeps winning market share and as MOB-015 is sold in Canada in 2026 and 2027.
The company has $39.8 million in cash and no debt. The company also has over $200 million in NOLs, which means the company won’t pay cash taxes for a long time.
Furthermore, Cipher has been buying back shares very aggressively.
John Mull owns 39% of Cipher’s shares, while his son Craig Mull–who is CEO–owns 2%. They are searching for an acquisition that is a low-risk and profitable dermatological company. If successful, such an acquisition would diversify their revenues and profits. They continue to be very patient in looking for the right company at the right price.
In the meantime, Cipher is generating about $14 million in free cash flow (FCF) per year. The market cap is $163.1 million while enterprise value is $123.6 million. EV/FCF is 8.8. The company is growing at over 25% a year and, as noted, it expects to triple revenues by 2027 and more than triple profits by then. Tripling revenues by 2027 would represent 44% annual growth over the next three years. This growth is based primarily on sales from MOB-015–and, to a much lesser extent, Epuris continuing to gain market share–and does not include any revenue from an acquisition.
Here are the multiples:
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- EV/EBITDA = 3.29
- P/E = 8.51
- P/B = 2.04
- P/CF = 9.02
- P/S = 8.18
ROE is 29.7%, which is excellent. Insider ownership is 44.5%, which is outstanding. As noted earlier, the company has $39.8 million in cash and no debt. TL/TA is only 7.5%, which is exceptional.
Intrinsic value scenarios:
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- Low case: Epirus may lose market share, MOB-015 may not be approved in North America, and/or Cipher may make a bad acquisition. Net income could drop 50% and so could the stock.
- Mid case: Revenue should reach at least $60 million by 2027 and net income should reach at least $50 million by 2027. With a P/E of 10, the market cap would be $500 million. That translates into $20.84 per share, which is over 225% higher than today’s $6.35. This depends on MOB-015 being approved in North America but does not include any revenue from an acquisition.
- High case: If Epirus gains market share, MOB-015 is approved, and the company makes an accretive acquisition, then net income could reach $80+ million by 2027. With a P/E of 10, the market cap would be $800 million. That translates into $33.35 per share, which is 425% higher than today’s $6.35.
RISKS
The main risks are that the company does a bad acquisition or that MOB-015 is not approved in Canada. (There is also a risk–albeit remote–that Epirus could lose market share.) Craig Mull has stated that they are being very patient with respect to an acquisition because they have a ton of cash ($39.8 million) and are producing high free cash flow ($14 million per year), meaning they can afford to be very patient. Craig Mull said they are laser-focused on not making a stupid move.
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