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

David Novak - Cormark Securities Inc Prakash Gowd - CIBC World Markets Inc. David Martin - Bloom Burton & Co Doug Loe - Echelon Wealth Partners

Thank you, operator. And good morning to everyone on the call.

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. Note all amounts are in U.S.

dollars. During the quarter we took significant steps to return our business to higher levels of profitability.

We announced the sale of our underperforming US assets. Through the quarter we completed the operational transition to EPI Health, and at the same time we addressed the overall cost structure for our continuing business.

Combined these changes improved the financial strength of our organization and as it evident in our Q2 results, we continue to deliver strong double digit growth in top line revenue and adjusted EBITDA. Revenue from our global licensing business rose 16% led by another strong quarter from Absorica.

This quarter Absorica prescriptions continue to increase based on the targeted and effective promotional effort by Sun, our marketing partner, which drove better than expected results and lifted market share to over 20%. While the program is clearly effective, it remains to be seen what kind of sustainable impact it will have on prescription levels.

We are watching market developments closely and expect to have a better picture towards the end of the year. These Absorica results more than offset the expected decline in the remainder of our royalty portfolio including Lipofen and tramadol brand.

These are late stage assets that continue to drive cash flow to the company with the very limited resources required from Cipher. Our Canadian business also enjoyed another solid quarter, delivering 18% sales growth versus the same period last year.

These results were led by Epuris as prescription grew 17% over last year's Q2 and 33% on a year-to-date basis. As our team continues to drive demand higher and higher we have reached a record market share of 28% at quarter end.

The remainder of our Canadian portfolio performed well, growing modestly off a relatively small revenue base and we continue to pursue strategies to increase sales and expand market access. Portfolio expansion remains a key priority.

And during the quarter we received Health Canada approval of OZANEX, a promising new treatment for impetigo. OZANEX will the first and only bacteriocidal topical antibiotic that offers a short five day dosing regimen and has demonstrated bacteriologic clearance as early as day three.

We look forward to making this differentiated product available to Canadians early next year. Our thanks and appreciation goes out to all Cipher colleagues for delivering another quarter of solid performance.

I'll now turn the call over to Stephen to review the financial results. Stephen?

Thank you, Rob. Good morning and thank you for joining us.

My comments today will focus on our continuing operations. As you know, we achieved a significant milestone in this quarter by divesting of our US assets, and this business is now reported as discontinued operation.

As Rob mentioned, it was a strong quarter for the company. Total net revenue increased by 16% to $9.9 million from $8.5 million in Q2 last year.

Our licensing revenue increased by 16% to $8.6 million in the quarter. The greatest contributor was Absorica which generated revenue of $7.5 million, up 32% from $5.7 million in the same period last year.

Our late stage assets Lipofen and Conzip contributed -- continue provide cash flow for the company. Revenue from Lipofen and its authorized generic version was $0.8 million compared to $1 million for Q2 2016.

And revenue from our tramadol products was $0.3 million in Q2 2017 compared to $0.7 million in the comparative period. Product revenue increased by 18% to $1.3 million in the quarter.

Sales growth continues to be led by Epuris, which generated revenue of $1.1 million, an increase of 10% over the same period in 2016. Over the past several quarters we've focused on reducing our operating expenses.

In Q2, total operating expenses decreased by 25% to $3.5 million from $4.7 million in Q2 2016. The main contributor was lower SG&A, which decreased by $1 million, or 25% to $3.1 million in the current quarter.

Total other expenses were $0.7 million compared to $3.1 million in Q2 2016. The decrease is mainly driven by a significant reduction in interest expense following the prepayment and amendments to our debt facility we announced in April.

Beyond this achievement, we are assessing our options with the remaining debt with the objective of lowering our cost to capital. One of the key financial highlights of the quarter was the 40% increase in adjusted EBITDA to $6.7 million.

Net income also increased significantly to $4.4 million, or $0.17 per basic share compared to $0.2 million or $0.01 per basic share last year. These results again underscore the profitability of our continuing operations.

We generated cash flow from operations of $4.5 million in the second quarter, and finished the quarter with $19.7 million in cash. The decrease from $33.7 million in cash that we had at the end of Q1 was attributable to the $22.5 million prepayment of our debt.

In summary, Q2 was a great quarter, highlighted by strong growth in revenue, reduction in interest expense and operating expenses. And we strengthened our balance sheet by decreasing our debt and leverage levels.

As a result, we are in an excellent financial position to execute on our growth initiatives. I'll now turn the call back to Rob for his closing comments.

Thanks very much Stephen. Over the past several months we've finalized our strategic planning which involved the review of our pipeline products and refinement to the Cipher growth strategy.

While it is clear that we have a strong foundation, to achieve the full potential of our business and deliver reliable growth, we are moving forward focused on these four key strategies. First, we will broaden our focus beyond dermatology; however, we'll narrow our interest to RX products only.

In addition to dermatology, we'll search for products in the category such as GI, women's health, CNS and a variety of others. Our search bias will be to acquire or license late stage commercial products for the Canadian market with sufficient clinical data to promote immediate filing of an NDS or products in late Phase 3 development.

While we will not specifically exclude legacy type assets, we'll preferentially target products with highly innovative and compelling profile that serve an unmet medical need and have the potential to deliver growth to Cipher. Second, we'll accelerate our growth through the pursuit of M&A with businesses that offer solid product portfolios, proven capabilities and where substantial synergies can be unlocked through effective integration.

Our acquisition strategy will encompass a prudent approach to capitalization aimed at reducing debt levels, ensuring balance sheet flexibility and minimizing our cost of capital. Third, we'll continue to selectively invest in drug development programs where we see a favorable risk return profile.

We'll seek development opportunities that create valuable products through application of innovative technologies requiring less capital and providing faster time to market. And finally in terms of geographic territory, while we are a Canadian entity we enjoy financial returns through the distribution of our products in multiple territories.

We'll continue to access markets outside of Canada through the capital light, high margin approach of out licensing. We understand Cipher is not the only company looking for products for the Canadian market.

We'll compete with the convincing story around disciplined execution. Cipher's compelling history of commercial, regulatory and partnership success, coupled with a proven track record of our strengthened team, serve to differentiate us from our competitive set in the Canadian marketplace.

Let me now turn to review status of our pipeline, beginning with Dermadexin and Pruridexin, which are indicated for Dermatitis and Chronic Pruritus respectively. While these are interesting brands targeting unmet needs as OTC products they do not fit with our growth strategy focused on prescription medication.

And therefore we are pursuing out licensing opportunities in all markets where these products are approved. Disciplined capital allocation must accompany our growth strategy at Cipher.

And evaluating the business case for Sitavig in Canada including the commercial dynamics, small market size and unfavorable economic returns, we've made the decision not to move forward. We remain committed to pick the Dalacin CF101, a novel first in class small molecule being developed for two large and highly valuable markets Plaque Psoriasis and Rheumatoid Arthritis.

Our partner Can-Fite commenced patient enrollment in the Phase 3ra program in the second quarter and plans to start Psoriasis Phase 3 program in the second half of 2017 with patient enrollment commencing early 2018. Looking at our earlier stage assets of ASF-1096 and melanoma, we are still in the process of determining our path forward.

Our Tattoo Removal Cream program holds potential to be a novel and important dermatologic treatment. Having recently met with our partners at Dalhousie University to review the technology and preclinical results in more detail, we remain excited about this opportunity.

Based on our assessment of the risk return potential, we've taken steps to advance the preclinical program. In closing, we believe Cipher is poised for a very exciting future.

I look forward to updating you on our progress in the coming quarters. We'll now open the call up to questions.

Operator?

Good morning, guys. Thanks for taking the call.

So very nice quarter largely attributed to Absorica on the top line. So I just kind of want to drill down on Absorica for a moment.

TRX volume in the quarter was really higher than we've ever seen; looks like you had over 90,000 scripts or 23% to 24% of market share according to IMS. So I guess the question here is how much of this is really related to Zenatane recall and how much could possibly be attributed to Sun's promotional campaign?

Yes, great, thanks Dave for the question. And for sure we are excited and were buoyed by the performance of Absorica.

We recognize as well it's a record high in terms of scripts and in terms of the royalties that we receive. Clearly this is a well timed and well executed promotional program that Sun is executing.

We know the program is targeted to the price sensitive marketplace and with a lower cost competitor going out of stock clearly that creates an awful lot of available demand for Absorica to have picked up. It would be very, very difficult for us to say what exact percentage is attributable to those two things.

But those are indeed the two factors. Zenatane recall is clearly out of our control in terms of when they will come back into the market.

But from the promotional program that Sun put in place, we were happy with the results and the sustainability of these new levels will be evident to us as time elapses and we get a better -- get a better bead on the stickiness of prescriber behavior and patient adherence. We expect to be able to have a better call on that towards the end of the year.

Perfect, that's very helpful, thank you. And just reading your M&DA so it mentioned that the promotional campaign completed in June, so hopefully you see some continued strength in Q3.

But just hypothetically if you see scripts start to tail off is this something that you can re-roll out again in Q4. How do you think about going back and then reintroducing the promotional campaign?

Hey, so that's a great question and good insights there. And the program in its original design completed at the end of Q2.

Program remains in place in a different design as more modest in its approach to the price sensitive side of the market. And so again that's another reason why it's pretty hard for us to call the stickiness of the situation right now.

But we are watching it very closely and one of the great things about the US marketplace is there is tremendous amount of data that can give us insight down to the patient level. And we are certainly having those conversations with our partner Sun because we do see this as a tremendously important asset and hopefully sustainable level of prescriptions moving forward.

Great, thanks and then just lastly maybe if you could talk a little bit about your BD pipeline. I don't know how granular you can get at this point but is there any insight you can give us into perhaps how many opportunities you are currently evaluating?

The size of the products, evaluation you are seeing, anything that you can kind of just give us a bit of insight there would be helpful.

Yes, so another great question. And certainly I am not going to comment on a specific number but I'd characterize our BD and corporate development activity is very ambitious.

We have an approach –that says – an approach and a view that we should really look at everything that's available. And frankly we should be generating our own deal flow from ideas that we have internally which we think we have tremendous bead on with respect to the competencies around our table for deal flow.

So we are very confident and we are very confident and comfortable with the level of deal flow that we are reviewing right now. And we hope to be able to update the market as time elapses and things progress.

Thanks, good morning, everyone. I only had just one question and it's around OZANEX.

I am just wondering if you could help me understand why the delay in launching that product, it got approved in May and maybe you can outline a little about the opportunities that you see for the products and specifically what sort of competition is there currently and how do you feel about he reimbursement landscape for impetigo products currently, waiting I guess until Q1 next year to launch. I understand there is a bit of seasonality that you might have missed out on this year but just little bit of clarity around your thoughts around the timing of that launch, why are you waiting that long?

Thanks very much.

Great, thanks, Prakash. Yes, so a few things implicating the timing of OZANEX and then I'll maybe make some comments about the commercial conditions in the marketplace.

And I'd say first and foremost, yes, we wanted to ensure that we were going to be disciplined in terms of the decision we are going to make on the products we select for commercialization and for capital allocation at Cipher. And with the complete turnover of the organization, reset of the organization last two quarters, it was important for the new organization to be fully aligned and behind any new programs as we go into the marketplace with and with launch planning and commercial assessments fully complete and attractive evaluation returns we see rendering from this program we are ready to move forward full steam ahead.

The second piece which is a little bit outside of our control but it's contractual has to do with supply and packaging. There is about four to six months lead time for the first initial order.

So at the very earliest this could have been December 1st launch given the approval. And I think we won't be much more than month or two behind that in terms of getting into the marketplace.

Relative to the way we are looking in impetigo and OZANEX, the thing we would guide this is a modest opportunity for Cipher. It is productive opportunity and it's an opportunity to have a good business case to move forward with, but it is a modest opportunity, the antibiotic, the topical antibiotic marketplace is $38 million and enjoying strong single digit growth in both dollars and unit.

However, the market is split between creams and ointment. And OZANEX will compete only in the cream marketplace and only for the impetigo indication.

So it is a modest opportunity that we have with OZANEX but a productive one and we are excited to move forward with it very early in 2018.

Good morning. As far as your partner Sun, I am wondering if they heard anything in the channels with regards to Reddy's coming back to the market with Zenatane?

Yes. So, Dave, no, we haven't -- there is no additional texture on that coming out of -- coming from our partner in the US.

As we've articulated on the call in the past, it was a voluntary recall to the retail level and this is based on stability issue as we understand it and time will tell whether or not they can resolve and solve their stability issue.

Okay. And the issue of Sun having the extra promotion and now they stopped that.

What were they doing during the period of extra promotion that they are not doing now?

Yes, so the details around the promotional program were basically limited to being an aggressive copay program in the marketplace. It was a copay program targeting both insured and non-insured patient population.

And that's -- that was the change it was made in March of this year and rolled after the end of June.

Okay. Next question.

Your operating expenses were up about $0.5 million versus Q1. Is that what you are expecting to stay for the remainder of the year?

Yes, I think on operating expenses, yes, between what you saw in Q1 and what you saw in Q2 is a good range. Q2 we did have some restructuring cost but those offset by some recoveries of stock based compensation.

But I think what you are seeing there is a good benchmark.

Okay. Also we've heard and you mentioned it as well, there is many other companies looking for assets in Canada.

We've heard from at least one other Canadian spec pharma company that it is not a buyers market right now. I am wondering if you share that view.

Yes. So relatively to BD our view on BD is what comes out of your BD finally your pipeline funnel has a lot to do with what efforts and resources you put against it.

As we've reduced the overall operating cost of the organization. We've also taken the opportunity to redeploy some resources, substantial resources internally against our commercial development function.

As such we think we are appropriately resourced relative to our competition set to really generate a tremendous amount of deal flow and find some great opportunities to pull through for Cipher.

Okay. And last question is if Epuris 30% market share, do you expect that to start to plateau now and if that's the case can you get the Canadian business to profitability if in fact you can't do that going forward and how do you envision getting to profitability in that scenario.

Yes. So I think first and foremost just continued tremendous commercial execution in the marketplace is going to continue to drive Epuris script higher and higher.

Everything we've seen about this marketplace unopposed promotion by Cipher in the market, market shares in different territory in different provinces much higher than our national market share lead us to believe there is no reason why Epuris -- there is no upside -- there is no ceiling to the Epuris market share as we see it today. So we think that this largest pro product in our Canadian portfolio has continues to have tremendous upside.

Relative to overall profitability of the acne business, absolutely we think that there is good growth ahead on both the top line and we think we are appropriately size and scale for the current portfolio we have with our footprint and we think we can get the profitability very quickly.

Yes, thanks very much and good morning, gentlemen. Just a housekeeping question just to start off with so Steve, other than the $1.7 million hold back that you talked about in note free in your finance, all other economic elements of the Innocutis divestiture been incorporated in your financials.

Yes. They have, yes, so this quarter we've kind of gain loss and we've basically been through that full operation transition and we set up provision for like returns and any obligations that we maintain as part of the transaction.

That's all reflect in our balance sheet

Okay, perfect, thanks for that. And then just question for both of you.

I mean I appreciate that you've given some insights into how your Canadian derm growth strategy might well evolve beyond derm; you mentioned GIC and women's health specifically. Just looking for some additional color and how your thinking was evolving and how you are specifically identified those three markets, first of all just wondering if your strategy would be if that defines the scope of your expansion beyond dermatology examples of where you are looking and whether or not those markets are driven by product opportunities that you are seeing or that's driven by core capabilities within your organization.

Just kind of wanted if you just kind of expand the theme on how you expect to grow beyond derm and sort of independent on how opportunities might come to you on an ad-hoc fashion. And I leave it there.

Thanks.

Yes, thanks for the opportunity to clarify. And absolutely those are simply example being used to say that we are going to have a broad approach to therapeutic categories.

Frankly, we are going to be therapeutic category agnostic. When we look across the capabilities and the capabilities and background of our team, we've been in the couple dozen therapeutic categories launch successfully scale, successfully captured market successfully in a variety of market with therapeutic categories.

So for us we are going to be agnostic as we move forward. And it's really going to be business case driven which is going to be a component of both favorable economics and most importantly whether or not the products that we are chasing and then we are bringing to the marketplace have a compelling value proposition, have a compelling reason to replace existing medication.

And that will be drive selection of opportunities moving forward. So it's -- I think importantly we are not getting out of derm.

We think we had a great run in dermatology. We are going to continue to look for great opportunities in dermatology.

And we are expanding beyond that. And we'll be -- it'll be agnostic therapeutic category moving forward.

But we are taking the position that we want to be in the RX business and RX business only and getting into the OTC game is just not for Cipher.

And maybe just from my own curiosity, any specifics you can point to on how Sitavig went from being an attractive opportunity to an unattractive opportunity on further inspection.

Yes, sure. I think when you look at -- when we did our commercial assessment for business case for Sitavig, Sitavig is a product that's would largely require some DTC effort to activate patients, the prescriber base for acyclovir and for cold sore medication is tremendously broad requiring a footprint to cover the GP marketplace and the economics just do not support to scale up of an organization because the returns, the upside of the top line sales that were available and just when you did the -- when we did the sort of disciplined economic analysis it just wasn't payroll to pull through and take it to marketplace and we'll let it go and we'll give back to our partner.

Thanks very much. Two additional questions.

First, I wasn't sure if you mentioned this specifically in terms when you spoke about avenues for growth and strategies for growth but could you give me your perspective on how you look at co promotion opportunities in the Canadian landscape just as an idea to more fully utilize your existing sales force. And then the second question is around Absorica reimbursement and any changes that you might have seen there.

Last year around this time it was removed from the department of defense formulary and I am just wondering if the recent Sun marketing program have been targeted at I guess at recapturing some or offsetting some of the issues with the higher deductible insurance plans in the US.

Right. So I'll take the Absorica question first then we'll circle back to your question around business development opportunities and partnerships.

So from Absorica perspective, I think we would just reiterate that the co promotion -- sorry the promotional program that Sun executed was a couponing program aimed at reducing copay across both insured and non-insured patients. There are no changes that we are aware of relative to the market access.

That was from one year to the next with respect to Absorica. And hopefully that answers your question on Absorica.

Relative to partnerships and business development, again we'll look at everything. Our experience is I think that with co promotion the economics are usually fairly unfavorable.

I think we can do better than that with respect to licensing and acquisitions and that's where we are more heavily focused on that to be sure.

Well, thanks again to everyone for joining our call this morning. And your continued interest in Cipher.

Have a great day and wonderful weekend.