Robert Tessarolo - President and CEO Stephen Lemieux - CFO

Prakash Gowd - CIBC Martin Landry - GMP Securities David Novak - Cormark Securities David Martin - Bloom Burton Doug Loe - Echelon Wealth Partners

Thank you, Krista 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 note that all amounts are in US dollars. Let me start off by saying how pleased we are with our 2017 Q3 results.

We delivered another outstanding quarter for Cipher, with continued double-digit growth in revenue powered by the strong performance of ABSORICA and EPURIS products. Our third quarter income from continuing operations also increased significantly, underscoring our exceptional execution to return the business to higher profitability.

Over the past several quarters, our team has accomplished a lot, all with an eye towards making Cipher more competitive and more profitable. We streamlined and simplified our business through the sale of our US assets.

We reduced the overall cost structure, while redeploying resources into our critical growth area of business development. We reduced our cost of capital substantially through a prudent and deliberate management of our debt facility.

We strengthened the management team with the addition of numerous highly accomplished professionals and we introduced an exciting new growth strategy for Cipher. Together, these changes position us to achieve the full potential of our business and deliver reliable growth moving forward.

Looking at the Q3 operational results in more detail, it was an exceptional quarter for our global licensing business, led by Absorica, revenue increased by 30%. Absorica prescriptions demand enjoyed another strong quarter increasing by 49% over last years’ Q3.

As discussed on prior calls, our partners promotional efforts have been successful at driving new demand and prescriptions for Absorica. We are very pleased that dramatic market share increases from earlier in the year were maintained in the third quarter where Absorica exited at 20% market share.

It was another strong quarter for our Canadian business. Highlighted by 24% year-over-year growth in sales, Epuris remains the primary driver as prescriptions grew 30% on a year-to-date basis and gained market share which now stands at 30% at quarter end.

We continue to believe there is market share capture opportunity for Epuris. In Atlantic Canada, for example, we have more than 60% market share, evidence there is upside with the right promotional effort.

Last month, we issued a statement on the impact of our partners manufacturing facilities in Puerto Rico, and I’d like to provide a brief update on the status of our supply chain. The Juncos facility that manufactures our tramadol products sustained minor weather related damage that has been repaired and the production suite is operational.

The Humacao facility which manufactures Absorica, Epuris and Lipofen sustained damage to the exterior of the production building. However the production suites and equipment were unaffected.

I’m pleased to report that Galephar has confirmed the resumption of production at both Juncos and Humacao and a stable long term plan for power generation. Cipher does not anticipate any impact to product supply resulting from the interruption of manufacturing at Galephar’s facilities in Puerto Rico.

I commend the Galephar team for their efforts in minimizing the impact to their operations in what was clearly a challenging situation. Today we’ve announced a new debt facility with CIBC providing an added debt capacity on improved terms.

These improvements to our cost of capital bolsters our competiveness and supports our growth strategy. Our thanks and appreciation goes out to all Cipher colleagues for delivering an exceptional quarter.

I will now turn the call over to Stephen to review the financial results and provide added color on our new debt facility. Stephen?

Thanks you Rob. Good morning and Thank you for joining us this morning.

My comments today will focus on our continuing operations. As Rob mentioned it was a very good quarter for the company and we entered Q4 on an even stronger financial foundation.

This morning we achieved an important financial milestone by signing a new three-year $20 million term facility with CIBC. The proceeds will be used to repay the remaining balance of the senior secured notes with Athyrium.

The new facility allows us to significantly reduce our interest expense and better reflect the financial strength and condition of the company. The new credit facility carries an interest rate of LIBOR plus 1.5% to 2.5%, based on our total debt-to-EBITDA ratio.

Today this translates to a rate of approximately 2.9%. Looking at the Q3 results in more details, total net revenue increased by 29% to 10.1 million from 7.8 million in Q3 last year.

Our licensing revenue increased by 30% to 8.9 million in the quarter. The main driver was Absorica which delivered revenue of 7.6 million, up 46% from 5.2 million last year.

Our late stage assets Lipofen and Conzip continue to provide high margin cash flow for the company. Revenue from Lipofen and the authorized generic version was 1 million compared to 1.2 million for Q3 2016, and revenue from our tramadol products was 0.3 million in the quarter compared to 0.4 million last year.

Product revenue increased by 24% to 1.2 million in the quarter, sales growth continues to be led by Epuris which generated revenue of 1.1 million compared to 0.9 million for the same period in 2016. The Q3 result again demonstrates our success in managing our operating expenses.

Total operating expenses decreased by 15% to 3.8 million for Q3 and 21% year-to-date. The main contributor was lower SG&A which decreased by 18% to 3.3 million in the current quarter.

Total other expenses were 1.1 million in Q3 compared to 0.8 million in Q3 2016. The results this quarter reflect a few factors.

Our interest expense decreased significantly from last year, because of a $20 million debt pre-payment that was made in April of this year. In addition, we incurred a one-time impairment charge of 0.6 million for the Melanovus assets as we have decided not to move forward with this early stage development program.

One of the key financial highlights of the quarter was the 62% in adjusted EBITDA to 6.7 million in the quarter. Net income also increased significantly to 3.9 million or $0.15 per basic share, compared to 2.2 million or $0.08 per basic share last year.

We generated robust cash flow this quarter and added 4.7 million in cash to our balance sheet, bringing us to 24.3 million at quarter end. In summary, Q3 was a great quarter highlighted by strong top and bottom line performance, with our growing cash balance and our reduced cost to capital.

Cipher is in an even better position to execute on its growth plans. I will now turn the call back to Rob for his closing comments.

Thanks Stephen. During the quarter we introduced a new growth strategy aimed at building a portfolio of prescription products across a broad range of therapeutic areas to serve unmet medical needs.

Our strategy is three-pronged, acquire or in-license prescription medicines for the Canadian market, acquire businesses with commercial products, proven capabilities or where substantial synergies are available, and collectively invest in drug development programs where we see a favorable risk return profile. With the core business on an excellent foundation, business development is a top priority for Cipher.

We are deploying significant resource against this both in-house and externally to ensure we generate a high volume of new ideas and deal flow. In experience you get out of business development what you put into it, and we are pleased with the expanding number of transaction opportunities for each of these three growth strategies.

In addition, we are encouraged by the feedback and engagement we are receiving from prospective partners. We believe we hold several competitive advantages making us the ideal Canadian partner to provide stewardship for new products coming to Canada.

In addition we continue to evaluate novel drug development programs and are advancing the promising candidates in our current product pipeline. During the quarter, our Canadian sales and marketing team continues to prepare for the launch of Ozanex in early Q1 2018.

This complementary product further leverages our existing Canadian sales and marketing organization. We remain excited about Piclidenoson, CF101, a novel first-in-class small molecule being developed for plaque psoriasis and rheumatoid arthritis.

During Q3 Can-Fite our partner began enrolling patients in to the phase 3 RA program and they expect to start patient enrollment in the phase 3 plaque psoriasis program in Q1 ’18. As we discussed last quarter, we are taking a highly-disciplined and rigorous approach to capital allocation.

In evaluating the business case for Nanolipolee-007, a pre-clinical candidate from the Melanovus acquisition, we have made a decision not to move forward with that program. And as Stephen mentioned, we terminated this agreement.

In summary, we are very pleased with the results of the quarter and with the momentum of our business as we head in to Q4 and get ready for 2018. We have a tremendous opportunity to build a differentiated growth story in the Canadian specialty pharma sector, and I look forward to updating you on our progress with our year-end results.

We’ll now open up the call for questions. Operator?

Congratulations on another solid quarter. Just a couple of questions from me; first on Absorica, can you talk a little bit whether or not you’ve seen some reimbursement changes for Absorica and has Sun provided you any feedback on what the gross to nets have been and what the trends are on that.

Yes, in terms of market access, we are not reporting any changes. Sun is not reporting any changes in market access to us and nor are we doing the same here today.

We remain encouraged by what we’re seeing in the market place in terms of script demand. Relative to your comment on gross to net, Stephen you can add some additional color on this if you like, but we continue to believe we are in the right healthy spot for gross to net from a US part of this profile, and we haven’t seen too much changes there on a quarter-to-quarter basis.

Yes, add to that Prakash, it has been consistent when we look out where we were Q2 to Q3 and it’s been slightly improving from where we were in Q1.

And those gross to net don’t really impact you, do they?

They do. So our royalty is based on net sales so it’s kind of the gross sales and we want to know what the gross to net adjustments are in turn.

So you haven’t seen anything really material lately.

No.

And then secondly, can you just update us on Vertical’s actions to address the FDA warning letter and then also on the REMS program requested by the FDA, what is Cipher’s responsibility on that and what sort of cost exposure might be there?

It’s an important activity for the quarter as well, and as we stated and as we continue to believe, we take all these compliance matters very seriously. We are very enthused by how well we work through with Vertical and how responsive they were to this matter.

As you know Vertical holds the exclusive US license to market and deal with the product. The corrective actions plan has been initiated; they are in full swing on it.

I think we’re very confident that they are going to have it locked down by the end of November, which is I believe the commitment date that we made when we responded, and so things are progressing well in that regard. It’s - relative to the REMS program this is a fairly large action at the FDA, there’s a significant consortium that are involved in this.

I think the exact expenditures on this will be more clear to us as we get in sort of first quarter and get through the first quarter of 2018. We’re getting a lot more texture on what exactly is required and how many people are going to be a party to this, and of course how the cost will be distributed is still up for discussions.

So, at this point we are not guiding on specific exposure on that program, but we believe by the time that we get to the end of Q1 we’ll have a better read and bead on that.

First question is on Absorica, one of your competitor has had some recall issues throughout the year, wondering if this situation has changed, and if Zenatane has started to be available or nothing is changed.

So Zenatane as far as we could tell is not back on the market, and we’re not seeing any prescription activity for Zenatane. If you recall that it was back ordered in December of 2016, almost 12 months ago, and it’s clear it’s difficult to determine how long it will take to reduce that product especially since it was a voluntary recall down to the pharmacy level.

One thing that we have detected in terms of competitive activity and a comparative analog, Amnesteem and other Isotretinoin competitor which began back order back in April of 2016. It did re-establish itself in the market in August of 2017.

But we would also point out and I think it’s important to reiterate that while Amnesteem has gained notable market share in the last three months, it really hasn’t had an impact on Absorica’s market share and we’re thrilled by that. Do you have another question Martin?

Yeah, just want to make sure I fully understand the impact on the hurricane. So there’s no supply shortage, there’s no supply issues.

Is that because the company had a little bit of an excess inventory on hand to palliate for the production shortage?

Yes. So if I understand you question correctly, how do we make it through an interruption in the actual manufacturing, that’s a fair question.

It’s a good question. Of course as all the safety stocks that are on hand from an inventory perspective and then also the supplier or manufacturer Galephar is very prudent and pro-active in terms of staying ahead of the game.

We’ve seen significant growth in Absorica, and it’s very important product for us over the last 12 months and as such we’ve been building inventory and ensuring we have the right plan in place for increased sales and so with the manufacturing interruption we’ve been able to sort get through that as well. There was a significant amount of product that was finished, that was in finished goods prior to the hurricane and all of that has been shipped out and blended into the inventory, which has given us additional berth in terms of a stock out date if we were not to be able to get manufacturing back up and running.

I just sort of penned through that, but we’re thrilled with how Galephar has went through, where there is certainly challenging circumstances in Puerto Rico and they’re getting back up online and having a very stable long term plan for power generation. We are very happy with the fact that we don’t expect any interruption now that manufacturing is back up and running.

And last question on the repayment of your term loan, is there going to be an early repayment penalty.

Yes, there’s a 5% early repayment penalty and 5% exit fee. So that was tied to the debt repayment to Athyrium.

So can you quantify that in dollar terms?

It was roughly 2 million.

2 million that will be paid in Q4?

Correct.

Most of my questions have been answered, but I guess I still have may be two outstanding ones. I’ll start by digging a little bit more in to Absorica here.

So looking at the IMS monthly data, February to June performance was absolutely stellar likely due to what Martin just called that the Zenatane recall, as well as the Ranbaxy promotion campaign. However it does look like subsequent to June based on the data that I have, it looks like market share is starting to split and return to base.

For example, it looks like TRX is down about 15% September over June. I’d be interested to hear your views on your expectations for Absorica going forward and whether or not there are any plans for further promotional campaigns or anything like that.

Thanks for the analytics in detail, we appreciate that. I think one of the things when we look at Q3 versus Q2 that has us somewhat very pleased is that even though we saw volume shrink we haven’t seen market shares go down.

There’s a tremendous amount of seasonality from Q2 to Q3. If you look back over the last five years, Q3 growth versus Q2 growth in the Isotretinoin market place, you’re seeing somewhere between an 8.5 and 11.5 decline in total prescription.

And so in the third quarter while Absorica prescriptions shrank slightly in terms of volume it was less than the market. And so for us as we think about this is, if the promotional program rolled out at the end of Q2 and Q3, Q3 changes were in line with the seasonality one would expect.

That is pointing to some stickiness in terms of the new levels of demand. And as we’ve tried to guide in the past we’re taking a conservative view on this and we really think Q4 is going to be the timeline for us to really have a good understanding if the market shares that we saw earlier in the year are going to be sustained over the longer term, and if that’s a new level of sustainable, and we’re excited, by what we’re seeing already in the quarter.

And just to make sure I fully understand that, I think in Q2 your Isotretinoin market share was about 24%. What is your market share this quarter?

So we’re reading off of different datasets. I think we’re looking at – we exited the 20% market share I think in Q3 and that’s approximately the same as what it was in Q2.

And then just lastly, in your prepared remarks this morning you alluded to stepping up business development activities, and this isn’t the first time we’ve heard you talking about this or your competitors. So, I was wondering if you can provide any insight in to what you’re really seeing out there in terms of types of products, maybe stage of development and valuations.

Thanks for the question, appreciate hearing that question because we certainly are focused on what’s next for Cipher and the other growth opportunities that we are creating through our development activities. In terms of the type of products we’re seeing, we are certainly seeking and we’re screening for products that are in late stage.

We’re looking for late phase 3 assets that have been followed in other jurisdictions and are ready to come to Canada. And in terms of the profile we were seeing the availability of products that have no good, clear, unique advantages that we think meet unmet medical needs.

We think that they are good products that are important for the Canadian market place that we can actually chase. In terms of the competition out there which I think is another of your questions, certainly there is these competitive processes if you are in the open ones.

We’ve tried to be very aggressive in terms of the way we’ve been able to detect and find great opportunities so we can be coming up for these ideas on our own and not necessarily be a subject to the process if they can drive valuations and multiples up.

Most of my questions have been answered to, but just following up on David Novak’s question about Sun. Are they considering restarting this enhanced patient co-pay program the co-pay assistance program while that [presented] those, would it not be a good time to continue to put the pedal to the metal?

I think the way we’re thinking about what Sun is doing in the market place is they’re doing the right things – they did the right things earlier in the year to drive market share and see it spike somewhere in the neighborhood of 4% to 5% market share just in this year alone. We think they continue to do the right things in the market place to sustain that level of market share.

They are certainly active in terms of their patient programs and as such no we are not going to guide anymore on the specific actions that they have in the market place, but we do think that they are doing the right things to maximize the value of this important asset.

Just a couple of housekeeping things from me, Rob your Canadian sales were of course mostly dominated by Epuris. That substantially sold, and that would imply that sales of Vaniqa; Actikerall; Beteflam were essentially nil in the quarter or barely above that.

Is that an expectation that we should have embedded in to our models for those three products in to kind of the Ozanex next question going forward or is there any specific initiatives that you think might lift those products above the baseline quarterly sales levels, so that’s the first thing. And then second of all, if there is any new information on CIP-Isotretinoin and regulatory status in the Latin Americas specifically Brazil, if you provided some baseline commentary in your MD&A, but if there is any new information or any expectations for timeline to have launched specifically in Brazil that would be helpful.

And that’s it from me.

Yeah, I think it’s important to keep in mind that while sales have been modest for Actikerall, we’re gaining share very nicely. I think this 5% market share gain on a year-to-date basis; the growth drivers for this product are clearly going to be market access.

The market leader in this category is the only product in the category that has market access, and it enjoys, I believe it’s close to 70% market share. The nice thing for us from an Actikerall perspective is we’ve got a positive CDR recommendation.

The problem is that the PCPA has got about three months delay in terms of getting to their files. So we’re estimating market access changes that might reflect the value of this brand sort of mid next year and beyond there, we believe we’re going to continue to see some market share capture.

But again we would guide and remind everyone that this is a fairly modest market place to begin with. Vaniqa is a very mature brand and a steady source of cash flow for us.

We’re not really expecting growth, just don’t think this is a growth asset for us, it’s a not a growth driver but it’s a good provider of a source of cash flow for us. And then as far as Beteflam goes, yes there’s been a tremendous amount competitive pressure in this market place.

We’re disappointed with its performance, and I think it’s a moment we’ve got some other products that can be much better growth drivers for us as we think about our Canadian business. I’m going to turn it over to Stephen to may be make comment and update folks on the [Latam] Brazil filing.

So Sun is running a clinical study that we’re going to use to help support the regulatory filing in Brazil. And then once that study completes and that will be part of the dossier to submit to the Brazilian authorities.

Thanks everyone for joining us, and have yourself a wonderful weekend.