Robert Tessarolo - President and CEO Stephen Lemieux - Chief Financial Officer

Doug Loe - Echelon Wealth Partners Anubhav Aggarwal - Credit Suisse

Thank you, Scott. Welcome and good morning, everyone.

On today's call I will make a few opening remarks before Stephen Lemieux, our CFO reviews the financial results in more detail, after which we will open the call for your questions. And please note that all amounts are in U.S.

dollars. I am very pleased to address our investors and analysts for the first time in my role as the President and CEO of Cipher.

In evaluating the opportunity to join Cipher, it became clear to me that this business is on a strong foundation with very attractive assets, solid track record of regulatory and commercial success, and a highly profitable royalty stream to support future growth initiatives, which in and of itself is a unique advantage. While the company has clearly undergone several difficult but necessary changes over the past year, it is in my view an exciting time to be in this position.

When I joined in March, the company was well down the path of divesting the underperforming Cipher U.S. assets.

Last week we were pleased to announce an agreement to sell substantially all the assets of Cipher U.S. to EPI Health.

This announcement marks a conclusion of our strategic review that began last year and was the culmination of a tremendous effort led by Stephen. These changes serve to simplify our business and reinforce our focus on the continued expansion of our Canadian commercial operation and our highly profitable global licensing business and our pipeline.

Through the incredible efforts of our Cipher employees, I’m pleased to report that these segments of our business performed well in the first quarter. Our results were highlighted by the strong overall performance of our licensing business led by Absorica, which drove a 16% year-over-year increase in total licensing revenue.

Absorica prescriptions rebounded strongly in March and we have seen this continue into Q2 based on weekly Rx data. Growth has been driven by two factors, including a voluntary recall to the retail level of a competitor Zanetine [ph] and Sun’s increased promotional effort with Absorica.

Our Canadian business also performed well in this period with 33% sales growth versus same period last year. Epuris prescriptions rose 35% year-over-year and hold an impressive 26% market share.

We now have four commercial products in Canada following the 2016 launch of Actikerall and Beteflam. The team continues to focus on increasing sales of current products and expanding the Canadian commercial portfolio.

Toward that end, we announced earlier this week that we have received Health Canada approval of OZANEX, a novel topical antibiotic for the treatment of impetigo, one of the most common and contagious bacterial skin infections in children. OZANEX has an attractive profile, offers a short five-day BID dosing regimen and has demonstrated bacteriologic clearance as early as day three.

We expect to make OZANEX available in Canada later this year. With that, I'll turn the call over to Stephen to review the financial results.

Stephen?

Thanks, Rob. Good morning and thanks for joining us.

I will begin by highlighting that the financial results I will discuss today refer to our Canadian segment only, this consist of our Canadian commercial business and our licensing business. The U.S.

segment formerly the Innocutis business, was classified as a discontinued operation in our financial results for this period, and are therefore excluded from my comments this morning. During and subsequent to the quarter we executed on two transactions our important financial developments for our business.

First, we announced last week that we sold substantially all of the assets of Cipher U.S. to EPI Health for cash consideration of $13.6 million subject to certain purchase price adjustments and the transfer of certain liabilities.

The purchase price also included a milestone of $0.75 million and certain regulatory conditions are achieved. On closing we received a cash payment of $7.6 million that was net of a hold back of $1.7.

Second was the amendment to our debt facility. This amendment allows us to use a portion of our strong cash balance to prepay half of our outstanding debt, which resulted in a significant reduction in our future cash interest expense.

As you will see in our financials, the results for Q1 2017 included a loss on the debt extinguishment of $5.2 million. While this amendment was effective in Q1, the $20 million prepayment was paid subsequent to the quarter end.

Turning to our Q1 results, as Rob mentioned, it was a good first quarter for the company. Total revenue increased by 18% to $8.1 million from $6.9 million in Q1 last year.

Our licensing revenue increased by 16% to $6.9 million in the quarter. The greatest contribution continues to come from Absorica which generated revenue of $5.6 million, up 24% from $4.5 million in the same period last year.

Revenue from Lipofen and the authorized generic version increased to $1.1 million, compared to $0.9 million for Q1 2016. This product continues to be a steady contributor for the company.

Revenue from our tramadol products in Canada and U.S. decreased to $0.1 million in Q1 2017 from $0.5 million in Q1 2016.

Looking at product revenue, which is now entirely the Canadian commercial business we saw revenue increase by 33% to $1.3 million in the quarter. Sales growth continues to be driven by Epuris, which generated revenue of $1.1 million in the quarter.

In terms of our expenses, total operating expenses decreased by 22% in Q1 2017 to $3.5 million from $4.5 million in Q1 2016. The decreased related to $1.1 million reduction in our SG&A expenses.

Total other expenses were $6.5 million in Q1 2017, compared to $0.5 million in Q1 2016. This increase in other expenses mainly related to the $5.2 million loss on the debt extinguishment.

One of the key financial highlights of the quarter was a 92% increase in adjusted EBITDA to $5.2 million in the quarter from $2.7 million in the comparative period. These results underscore the profitability of our Canadian segments.

Net loss from continuing operations was $1.6 million or $0.06 per basic share in the quarter compared with net income of continuing operations of $1.8 million or $0.07 per basic share last year. I just like to remind everyone that the net loss includes the $5.2 million loss on the debt extinguishment.

We finished the quarter with $33.7 million in cash. However, as mentioned, subsequent to the quarter we paid $22.5 million as part of the debt amendment and we received $7.6 million from the sale of the U.S.

segment. Looking ahead, our financial position remains solid, we have a healthy cash balance that we expect will continue to grow based on our profitable Canadian segment and we have reduced our outstanding debt in half.

I will now turn the call back to Rob for closing comments. Rob?

In closing, on behalf of the team including the directors, I would simply thank our investors for their patience as we’ve undergone these changes over the last year. The business is undeniably in a better position financially and it is in our view better positioned to deliver profitable growth for shareholders.

In terms of what's next for Cipher. We don't have all the answers for you today.

We are well along with our annual planning process and look forward to sharing more about our objectives, priorities and strategies for growth in the coming months. What I can tell you is we expect to build on this strength of the organization today.

Our global licensing business continues to deliver robust cash flow providing us with non-dilutive financing to support our growth plans. Our Canadian business has generated consistent sales growth and provides a dependable platform for future product launches.

Our company has an enviable track record of bringing late-stage products to regulatory approval, which we see as a core competency necessary to support future growth, and last we have attractive assets in our pipeline and in a fortunate position that much of the remaining development investment will be borne by our partners. These fundamentals of our business have us poised for an exciting future.

I look forward to personally meeting with many of you in the coming months. And we will now open the call up for questions.

Scott?

Yeah. Thanks very much and congratulations on the strong quarter, truly lifted by U.S.

Absorica revenues as you alluded to. So maybe just a couple of things that are sort of CIP-ISOTRETINOIN focus.

One is just wondered if some of the market share lift that you are experiencing from the impact of the [indiscernible] recall back in February. Just wondering based on some of your own market intel and some pharmas market intel whether or not some of the market share clawback that you are generating here might actually be sustainable in the future quarters or if you think that most of the market share that you are acquiring here is still price sensitive and thus likely to revert back to generic formulations once available.

So that’s the first thing. And then second of all in your M&DA you talk a little bit about rest of world market on CIP-ISOTRETINOIN without giving too many specifics on potential time lines to launch.

So just wondering if you could provide a little bit of color maybe on what your Latin American strategy is specifically in Brazil and if there is any specific timelines on regulatory advances and product launches in Latin America that you can share at this point and I will leave it that? Thanks.

Great. Great.

Thanks, Doug. So, it’s Rob, I will take the first part around Absorica what we are seeing in the U.S.

and then Stephen will chime in our Latin America out licensing. Yeah, so, first I discuss, really the two factors driving Absorica Rx growth are the voluntary recall of Zanetine [ph] and Sun’s increased and targeted promotional efforts.

We are seeing this well-timed effort is getting traction in the marketplace like I think everybody is seeing the blip in prescriptions and are -- the way we are looking at this is depending on how long these programs run for that Sun has undertaken and when the programs roll-off we will best be able assess how sticky the increased prescriptions will be towards the end of the summer. That’s the way we are looking at the upside for Absorica.

We don’t want to get ahead of ourselves. We are certainly encouraged by it.

But I think as these programs roll-off we will have to see how it goes and we will assess it that time.

Okay.

Yeah. With respect to Latin America, so we are looking for partners in Latin America outside of the Brazil market.

In Brazil this is licensed to Sun. Sun is working on a clinical study to help with their registration in the Brazil market to try to get that food effect claim.

So we don’t – based on that and the timing we don’t expect to see anything substantial from a revenue perspective in 2017.

Okay. That’s great.

Thanks very much.

Okay. Thanks, Doug.

Yeah. Hi.

One question on Absorica, this quarter benefited from restocking in Absorica after destocking which happened in the December quarter whereas still the royalty amount that Cipher has reported is very similar to what we reported in September quarter. I am saying similar because there was a price increase in Absorica as well.

So the only confusion here is where is the restocking benefit which is showing here if the March quarter royalty is similar to September quarter royalty number. The difference between then can be explained by price increase.

I don’t see the restocking benefit flowing in now?

Are you asking like, like restocking from Ranbaxy into the channel or us supplying product to Ranbaxy?

Yes.

So, I can’t comment on what Ranbaxy sells into the channel. Like their -- that’s their product and they provide what they need to make sure the channel is filled.

We do have manufacturing rights so we do provide what they need to meet demand and they do provide us with that information, but I can’t comment on their strategy for how they stock the channel.

Yeah. So my question is that when you report a royalty number if that number on the sales done by your partner or if that just what you supply to the partner?

The licensing revenue is a combination of our supply to the partner and the royalties that we receive from the partner.

And that is -- may -- that may or may not be linked to the actual sales done by the partner?

Royalty is based on what our partner sells into the channel on a net -- it’s on a net sales basis.

Okay. Just one more clarity on this, have you gained any market share right now in Absorica as of now versus the December quarter.

Yeah. Again, yeah, as Rob mentioned, in Q1 we did see market share gains from the combination of the increased promotional efforts and the recall issue with Zanetine [ph].

Can you quantify what percentage of market share you got?

I think we are roughly -- market share I think is roughly around 15% and we were traditionally probably in the 8% to 10% range.

Okay. Thank you very much.

Thank you.

Thank you.

Hi. This is Prasad Pandurangan [ph] on the line on behalf of David Martin.

I have got a couple, first, Epuris has seen impressive growth, so I am trying to understand the room to grow in terms of market share as well as potential for market expansion and also color on the other Canadian products, there -- the earlier targets are probably not valid now, so do you have any revised updates on that? And secondly, slightly higher level, now that the burden of the U.S.

business is gone, how do you propose to deploy the royalty cash flows going forward? Thank you.

Great. Yeah.

Thanks, David. So relative to Epuris, clearly we are excited about the market share gains that we've seen -- we have seen close to 7% market share gain this first quarter this year versus first quarter last year.

This is a two product marketplace. There used to be three products in the marketplace.

One of the competitors had a stock out for some time. A third product in Epuris were over performing what we expect to and we don’t see an end in sight.

We do believe there is the additional market share capture available to us with some folks and continued promotion in this marketplace. So we are very -- we see Epuris as a growth driver moving forward and something we can continue to count on.

Relative to the other products in our portfolio, here is really how we are looking at it. Actikerall well modest in terms of current sales.

We are seeing consistent share gains in the marketplace through our promotion and it’s important to note in this marketplace the leader in the market holds close to 75% market share and it’s the only product that enjoys market access. Earlier this year we received a positive CDR recommendation for Actikerall, which we think will be a growth driver for the product moving forward and we are working very hard to pull this positive CDR through with [indiscernible] listing agreements to the end of this year.

So again this is a growth driver for us. Vaniqa not much to say on this product.

We see this is a mature product. It’s been in the market for many years.

It’s a steady source of our cash flow. It’s not a growth driver for Cipher.

And Beteflam to be candid has been disappointing. There are some significant competitive pressures in the marketplace with the launch of new preparations by the market leader and we do expect our share capture will continue to be somewhat compressed as we review our go-forward commercial products.

Relative to shifting to your second question with respect to deployment of capital, I think, one of the first things that we are going to try get out towards the end of this summer is to clearly articulate our strategy, our business development strategy moving forward. We need to do a comprehensive pipeline review to make sure we have a clear current view on the product potential, the path to value and risks associated with each of those programs, to understand where we want to invest against.

And I think, secondly, business development will play a huge part in what we do moving forward and as such that that’s an area for capital. Clearly, we have some commercial launches ahead of us in Canada, with the recent approval of OZANEX, that falls in my mind to our pipeline, which we need to completely wrap our arms around how significant this product can be in Canada and how much resource it will need and so that as well will be a potential source for capital deployment moving forward.

Okay. Thank you very much.

Okay. Great.

Well, thanks everybody for joining us this morning. It's been great speak with all of you this morning my first opportunity.

I look forward to meeting with many of you in the coming months. Hopefully, some of you may join us later this morning at our AGM down here on Bay Street, Toronto and until such time as we see you.

Stay well. Thank you very much.