Stephen Lemieux - Interim CEO

Martin Landry - GMP Securities Prakash Gowd - CIBC Doug Loe - Echelon Wealth Partners Joe Walewicz - Laurentian Bank Securities David Novak - Cormark Securities

Thank you. Operator Good morning everyone.

On today's call I will review the operating and financial results for the quarter and full year after which we will open the call for your questions. Please remember that all amounts discussed are in U.S.

dollars, the highlights for Cipher in 2016 where our Canadian operation continues to show strong growth increasing by over 40% to 4.1 million in revenue led by Epuris. Our total operating expenses with the excluding cost of goods sold and impairment charge which I will discuss were 8.6 million for the quarter a decrease from 10.1 million in a comparative period and 9.6 million in the third quarter of this year.

A reflection of the company's efforts to reduce costs, the royalty business which is a source of significant cash flow delivered study results of 25.6 million in revenue and we added more than 7 million in cash during the year ending the year with 34.5 million. As we discussed on our third quarter call the Board has made it a priority to improve the overall profitability of the business towards, that end we have been engaged in a thorough review of the business plan and the cost structure.

In particular we have been concentrating on alternatives for the U.S. business with the goal of greatly reducing the losses from that segment.

Although the U.S. operation delivered better sales performance in the fourth quarter we have taken steps to reduce our cost structure and through these initiatives we expect to achieve cash savings of approximately $3 million on an annualized basis.

At the same time we continue to pursue strategic options for the U.S. business which remains a priority.

I will now review the operational and financial highlights for the fourth quarter and the full year. The overall sales results for the fourth quarter were good with total revenue rising 10% to 10.7 million from 9.7 million in the comparative period.

An increase in product revenue of 2.3 million was partially offset by a decrease in licensing revenue of 1.3 million. Looking at the royalty business, licensing revenue decreased to 5.4 million compared to 6.6 million in the fourth quarter of 2015.

Revenue from Absorica decreased 3.8 million or decreased to 3.8 million for the fourth quarter compared with 4.3 million for Q4 2015. The main reason for the decrease in the quarter was lower shipments from our partner into the channel and as we earn royalties when the product is sold into the channel.

Although the fourth quarter declined licensing revenue from Absorica and isotretinoin in South America was unchanged at 19.2 million from the prior year. Revenue from tramadol products this is ConZip in the U.S.

and Durela in Canada decreased to 0.4 million in Q4 2016 compared to 1 million in Q4 2015. I like to remind everyone that revenue in Q4 of 2015 did include a sales milestone for ConZip for approximately 400,000.

Revenue from Lipofen and the authorized generic version of Lipofen was 1.2 million for Q4 2016, a slight decrease from 1.3 million in the prior year, this product continues to be a steady contributor for the company. For the full year licensing revenue was 25.6 million similar to levels experienced in 2015.

The segment of the business continues to generate strong margins and substantial cash flow to support future growth initiatives. Total product revenue in the fourth quarter rose to 5.3 million from 3.1 million in Q4 last year.

Revenue from our U.S. commercial business was 4.2 million in the quarter up substantially from 2.2 million in Q4 2015 and 1.5 million in Q3 of 2016.

This increase over the comparative period was driven by increases in the three core brands, Bionect increased 900,000, Sitavig 700,000 and Nuvail approximately 300,000. If we look more closely at the key brands, Sitavig sales were mainly driven by growth in prescriptions which were up 18% from Q3 2016 and Nuvail also showed improved trends in prescriptions with prescriptions up 16%.

Looking at the Canadian business product revenue increased to 1.1 million 21% growth over the prior year. For the full year product sales from Canada reached 4.1 million up from 2.9 million last year.

Sales growth continues to be driven mainly by a Epuris which had a net sales point 0.9 million in the quarter and 3.7 million for the year, an increase of 42% over 2015 and the market share for this product is now over 25%. The Canadian commercial business has four commercial products following the 2016 launch of Actikerall and Beteflam.

The team continues to focus on increasing sales of current products and expanding the commercial portfolio. We have three late stage products, one is approved [indiscernible] and we are working through launch plans.

Two other Sitavig and [indiscernible] are pending approval. I have reviewed the components of sales now let me review the other financials.

Given our full financials and MD&A are filed, I will keep my comments here brief. Total operating expenses for Q4 were 20 million, an increase of 9.3 million over Q4 2015.

The main factor was a 9.7 million impairment charge for intangible assets and goodwill related to the U.S. business.

For the full year the financial results reflected 29.2 million impairment charge against intangible assets and goodwill. Selling and marketing expenses improved in Q4 to 3.3 million compared with 3.5 million in Q4 2015 and 3.4 million in Q3 of 2016.

Our G&A expenses decreased to 5.2 million from 6.4 million in Q4, 2015. G&A expenses also included approximately a $1 million of severance costs and this expense was partially offset by reduction in amortization of intangible assets.

Adjusted EBITDA for Q4 2016 was 1.3 million and included severance costs of a $1 million. Adjusted EBITDA increased from 1.2 million in the third quarter of 2016 but decreased from 1.8 million in Q4 of 2015, in the comparative period the company earned a milestone payment of approximately 400,000.

Net loss in the quarter was 11.3 million or $0.45 per basic share compared to net income of 2 million or $0.08 per basic share in Q4 2015. Excluding the impairment charges the Q4 net loss would have been 1.6 million or $0.06 per basic share.

Despite the operating losses in the U.S. we increased our cash balance by 3.9 million in the quarter and we closed at 34.5 million at the end of the year.

At the corporate level we are making progress on the CEO recruitment process and we will provide an update when this process is concluded. In closing we have taken steps to improve profitability of the company and we have improved adjusted EBITDA and we have lowered our operating expenses through reducing the cost structure in the U.S.

and other operational efficiencies. The outlook for the business continues to be positive overall and we build on several key strengths.

Our royalty business continues to drive robust cash flow and our lead product gives us multi-year revenue visibility. Our Canadian business provides a platform from which we can build a bigger commercial operation, we have a great team for commercial products in three late stage products and we continue to maintain a strong financial position with a significant cash balance.

We'll now open the call to questions. Operator?

So the first question is on your cost savings, you have identified $3 million savings. I was wondering if you could break down a little bit where do savings come from?

So the savings come from both sales and marketing and G&A and it's a combination of -- we have had some turnover in the company and we're not filling those roles, so we have managed that from our staff internally and from cost containment initiatives we put in place as well.

Okay. To what extent are you reducing your sales force in the U.S?

The current U.S. sales force in the U.S.

is approximately twenty 20 reps and we have had some turnover in that group.

So did you reduce your sales -- are you reducing your sales force to generate these savings or its just -- I am not clear.

Because we have had turnover in the sales force and those are territories we haven't filled. So that's part of the savings is just from having a smaller sales force today than we had historically.

Okay. And what's the timing on the realisation for $3 million, is it already realized or is there still some cost savings to come up?

Yes, those are steps we put in place, we will realize that savings on an annualized basis.

Starting in Q1?

Correct, yes.

Okay. Then on your right off you had taken a large write off on your U.S.

business in November, I'm just curious what's changed in the outlook since November to trigger another write down of your U.S. business?

Yes. So in the November we had a third party valuation done on the business and that's roughly where we had taken the write downs to as we've progressed in the process of assessing the U.S.

operation we've had a number of non-binding offers that have been submitted and the write down is more reflective of where the current market value is for that business.

Okay. That's helpful.

And then just lastly I'm sorry could you maybe talk a little bit about the prescription trends during the quarter and post quarter if possible?

Yes so I think we've seen on the prescriptions we had seen slight decline through the quarter but we're seeing in the shipments that are going out to the channel, we saw some weakness early in Q4 but we've seen that stabilize since then.

Okay And into Q1 as well?

Yes.

I have just a couple of follow up questions on Absorica. Q4 obviously came in a little bit lighter than we expected and can you just help me understand a little bit about that -- was that more of an inventory drawdown, and can you talk about what the estimated inventory levels were at the end of 2016 and then also on Absorica.

Have you taken price increases and if so can you approximate how much and when that was taken and lastly in Absorica we've heard that Promius may have had some supply issues with their product, I'm just wondering if that would have any positive impact on Absorica which we could expect in potentially stronger Q1?

So I will also start on. On the shipments in the quarter there was some inventory drawdown early in Q4, we've seen that stabilized since.

On the price increases I can't confirm whether [indiscernible] taken price increases but I could follow up on that for you and likewise with the Promius piece there is inventory shortages that could be an advantage to Absorica going forward.

Okay. Then on the U.S.

business it looks like things are doing okay despite some of the cutbacks, the turnover in sales force and some of the uncertainty there. Just trying to understand if this is basically simply a lag between promotional efforts and realized sales or is there other things at play here.

Can you talk maybe about have there been any changes in reimbursement or coverage pricing and then lastly on the U.S. business what do you think or what do the internal estimates or what a minimum level of sales support would be required to kind of keep things flat?

Yes, with the U.S. So we had no change in the current coverage that we have for our products nor have we taken any price increases in the fourth quarter or since.

With respect to sales support so our current sales staff now, they been able to maintain and slightly grow their business.

So currently you have 20 reps you said, right Stephen?

That’s correct. Yes.

Can you just remind me what it was at the end of Q3?

We're approximately 28 reps at the end of Q3, yes.

I think I'm just going to be asking the same questions my peers did just maybe in a slightly different way. Again Absorica focused, [indiscernible] focused.

So Stephen what's your best thought feedback from Sun Pharma on how they would expect to sort of reinvigorate Absorica sales into 2017 and 2018 based on the increasingly genericized environment that they're encountering including but not limiting to Dr. Reddy's launch last year.

Just kind of wondering on kind of a high level what sort of promotional initiatives they might be undertaking in order to stabilize or perhaps grow that brand when it has clearly a differentiated pharmacokinetic profile that they certainly could be featuring in promotional efforts. So just some high level commentary there would be helpful and then second of all.

On in [indiscernible] we talked at some length here about some cost containment there and reduction of sales reps through attrition mostly but just on a on a strategic basis I was just wondering if as a firm you were still going to deploy any resources at all to actively promoting a sort of [indiscernible] in U.S. markets so if you're just kind of in a holding pattern until some strategic alternatives is explored on in acuteness so just some sense on how much investment you might put into that business in the medium term while product revenue has were up in recent quarters is only you know up modestly and lower than what we had originally expected and then thirdly just a little bit about housekeeping question, in your MD&A and in your commentary you mentioned that we licensing revenue for Absorica in Brazil and Chile was 19.2 million last year that looks a little high.

I'm not sure where it's coming from. So if you could just kind of comment on that value and maybe just a broader discussion of what's your Isotretinoin marketing strategy is in South America that would be helpful feedback as well.

I will leave at there.

Okay. So on the first one with respect to Absorica and promotions so they are -- I mean this brand this is a significant brand for Sun and they are doing -- they do have the advantage of the WHO [ph] claims and they are running some clinical programs to help increase promotional material to support that.

I will skip to the Brazil as well, so 19.2 that’s the Isotretinoin franchise so that’s Sun plus what's going on in South America. So we've had sales in the U.S.

but in Brazil Sun is still working through the regulatory process and they're trying to get the premium pricing with the food label indications that process is still ongoing. So they haven't launched in that market yet.

With respect to the U.S. market, so we are just like for Sitavig our main brands that we -- some of our sales reps sells on the street and we still are actively promoting those products in the market to try to drive revenue and profitability from the assets that we currently own.

Just returning to that so the market question though I mean yet so you're cumulative licensing revenue last year was twenty five point six and nine hundred point two and I couldn't possibly come from Brazil and Chile is understood it was just going to fly just to let me know where that number came from that would be. Helpful thanks again nineteen points you include the US as well as the isotretinoin franchise.

Okay. Or maybe just returning to the South America question, though I mean your cumulative licensing revenue last year was 25.6 and 19.2 of that couldn’t have possibly come from Brazil and Chile.

So I'm just, maybe can I just give you a call offline so just let me know where that number came from that would be helpful. Thanks.

Yes, 19.2 includes the U.S. as well, its isotretinoin franchise.

Okay, well that’s not ourphrased in the MD&A. So I appreciate that color.

Okay. Thanks.

Just a quick question on the debt, you mentioned at quarter end 34.5 million in cash, the debt approximate 36.4, you're getting awfully close to -- when do you think you'll be in a position to retire the debt. And then second is just discussing the intangibles just so we're clear, you are taking 29.2 million in impairment related to that 45.5 purchase price, book value -- the remaining book value is like 16.3 roughly does that all make sense?

Yes. So the book value in the U.S.

The U.S. is closer to 11 million, just below 11 million.

The balance on the intangibles relates to assets in the Canadian business. On the debt side, so we do -- we have a good relationship with the Aterian [ph] who is our partner on debt and we're kind of looking at that process, looking where the data is and winds with the strategic transaction in the U.S., we will continue to have that conversation and see where we go.

Just two quick ones for you. So you mentioned that you've received a handful of non-binding offers related to the divestiture to U.S.

business so just curious the interest that you've received is it exclusively related in [indiscernible] or have you had inbounded interest for a combination of the U.S. and Canadian products business or perhaps even the entire company?

No we're focused on dealing with the U.S. business in the interest I discussed relates to that operation.

And just on the licensing side of the business so obviously you know this will become more of a significant quarter to Cipher once you do divest the U.S. business, are you looking at any opportunities to perhaps build out additional licensing streams and could you give any perspective or color around that?

Yes so like just give an example like if you think the Dermadexin and Pruridexin brand we have so that that does have regulatory approval in Europe and we are looking for licensing partners in the European market, started monetizing that royalty stream. We're also in discussions with companies as well in line in South America for isotretinoin, tramadol and the fenofibrate franchise as well.

So we are actively working on those areas.

Stephen I just wanted to ask about the Canadian business, can you just update us on the expected timing for the approvals for the two products that are before Health Canada now?

Yes, so Ozenoxacin we're expecting approval in the Q2 and Sitavig will be later in -- we're looking at late Q3, Q4 timeframe.

Okay. And do you anticipate launching them immediately after approval?

You know I mean the plans we're probably looking -- I think Ozenoxacin will go through the launch plans -- we are probably looking at the back half of this year. Sitavig depending on timing we will probably be in early 2018.

I would like to thank everybody for their time today and I wish you all the best. Have a great day everybody.