Robert Tessarolo - President and Chief Executive Officer Stephen Lemieux - Chief Financial Officer Chris Watters - Vice President of Corporate Development

Andrea Uddin - Mackie Capital Research Prasath Pandurangan - Bloom Burton

Good morning, everyone. It's Rob Tessarolo, President and Chief Executive Officer of Cipher.

Thank you, Luke, and good morning, everyone. Joining me from Cipher are Stephen Lemieux, CFO; and Chris Watters, Vice President of Corporate Development.

On today's call, I will make a few opening remarks, and Chris will review two of our recent transactions before Stephen reviews the financial results in more detail after which we will open the call for your questions. Note that all amounts are in US dollars.

Cipher has undergone a significant transformation over the last 12 months. We have clearly and successfully repositioned the company for growth, and we are executing on our new strategy.

Let me begin with a review of the Q1 highlights of our current operation. While total revenue was down in the quarter, which we pre-released last month, a major highlight was the 45% revenue growth from our Canadian commercial business.

The increase was primarily driven by Epuris, our largest product, which continued to perform well, having reached an all-time high in TRX in the quarter. We continue to win share and currently hold more than 30% market share compared with 26% in the same period last year.

As we discussed in the last call, we launched OZANEX in the quarter. And while it's early, OZANEX has achieved all our launch metrics, and we're pleased with the qualitative feedback and high engagement from key dermatologists as well as the extensive coverage on private health care plans.

Actikerall is also demonstrating healthy growth, achieving 93% year-over-year growth in total prescription. This segment of our business has an impressive five year CAGR of 68%, and we have several catalysts to support the continued organic growth.

Over the past year, we've enhanced our organizational capabilities, attracting accomplished sales and marketing leaders with rich histories of leading commercial outcomes in Canada, and you are seeing some of the early results. Turning to our global licensing business, which experienced a material revenue decline over the prior year to $2.8 million in the quarter due to the previously disclosed impact on Absorica.

Recall that 2017 was a record year for Cipher's Absorica revenues based on our partner's successful promotional campaign. However, as we discussed in our Q4 earnings call, we were cautious heading into 2018.

Following changes to this program at the end of November 2017, Absorica prescriptions have decreased as expected in December 2017 and Q1 2018. Absorica's market share, which peaked at 22% during 2017, ended March 2018 at approximately 12%.

Looking ahead, prescriptions have stabilized and market share has leveled off to approximately pre-promotion level, and we expect Absorica to provide a solid base of high-margin royalty revenue for the full year. In 2017, as part of our transformation plan, we introduced an exciting new growth strategy for Cipher to assemble a broad portfolio of prescription products that will diversify our business, deliver reliable growth for shareholders and reduce our revenue concentration in the Absorica royalty stream.

We redoubled our efforts in business development beginning in June last year to ensure Cipher would have a highly productive deal flow into 2018 and the results to date have been outstanding. We launched one new product in Canada and announced four transactions that we expect will add six products to our Canadian commercial portfolio in 2018 and 2019 by an additional revenue diversification, growth avenues in new therapeutic categories and near-term catalysts.

I will introduce Chris to discuss these transactions. Chris?

Thank you, Rob, and good morning, everyone. On our last call, we profiled the acquisition of our differentiated product TRULANCE, an FDA-approved once daily tablet for adults with chronic idiopathic constipation and irritable bowel syndrome with constipation.

The organization is very excited about this product. First off, it brings a high value, new and differentiated GI product into our Canadian portfolio.

TRULANCE has established a strong and remarkably consistent efficacy in safety profile in clinical trials of more than 4,700 patients and offers a differentiated tolerability profile. Secondly, this is an attractive market.

Both CIC and IBS-C patients have significant unmet needs, characterized by ascendancy of new patients and minimal advancements in available therapeutic options. It's estimated that one in four Canadians have symptoms of constipation, with the total Canadian laxative and antispasmodic market for both prescriptions and OTCs being valued over CAD 200 million annual sales.

And finally, this is a market that several of our team members know very well, having launched the Canadian market leader in this category. We expect to file our NDS with Health Canada in the second half of this year.

In April, we licensed the second highly novel and differentiated product for Canada, A-101 40%, which is recently launched in the U.S. under the brand name Eskata.

This is a topical solution indicated for the treatment of raised seborrheic keratoses or SKs, which are commonly occurring noncancerous skin growth and affect more than nine million Canadian adults. The most commonly used approaches for SKs are surgical procedures, such as cryotherapy, which can cause discomfort, cosmetic imperfections and require wheel management.

A-101 40% is a proprietary, high-concentration hydrogen peroxide-based topical solution that is applied directly to raise SKs using a pen-like applicator. Because this product can clear raised SKs without cutting, burning or freezing the skin, we believe there is a particular compelling proposition for SKs in the face, neck and hands.

Upon approval, A-101 40% will be the first and only prescription treatment for raised SKs, and will further leverage our commercial organization, building upon the strong pricing Cipher enjoys in the Canadian dermatology market. We are targeting New Drug Submission to help Canada later this year.

I will now turn the call back to Rob.

Thanks, Chris. The third key transaction since our last call was the definitive agreement to acquire Cardiome's Canadian business portfolio.

This deal is an exciting step for Cipher and brings multiple value components to our organization. First and foremost, it's an attractive acute care portfolio with revenue, growth programs and near-term launch opportunities.

These products provide us a foothold in the hospital segment, which has attractive dynamics, including strong growth and lower commercial investment versus general medicine opportunities, thereby providing less stress on our P&L as we scale into the market. We anticipate peak sales for this product portfolio to be in the $8 million to $12 million range, led by Brinavess and Xydalba.

Brinavess is indicated for the rapid conversion of recent onset atrial fibrillation to sinus rhythm and has demonstrated superior efficacy versus the other IV products, namely faster onset and higher percentage of patient's cardioverting. Brinavess is approved in Canada and available to patients; however, it has not been commercially launched.

Xydalba is used for acute bacterial skin and skin structure infections, also known as ABSSSI. In March of this year, Health Canada accepted the New Drug Submission and granted Priority Review Status to the application.

This decision underscores the significant medical need that exists for Canadians suffering from ABSSSI, these are serious life-threatening infections. Xydalba is the first and only 30 minute once-dose treatment option that delivers a full force of IV therapy.

This compares with other aggressive anti-infectives and antibiotics that require daily dosing for 10 to 14 days, which can be challenging for patient compliance and place additional stress on hospitals vis-à-vis discharge. Additionally, the proposed transaction structure allows the preservation of Cardiome's existing tax attributes, thereby providing strong and immediate cash flow accretion for Cipher.

The transaction was approved by Cardiome's shareholders yesterday in their Special Meeting, and we expect to close the transaction this quarter. In short, we have made tremendous progress with our growth strategy in 2018.

Our Canadian commercial business is growing strongly and provides the platform, which we can continue to build on with highly novel products in multiple therapeutic categories. I will now turn the call over to Stephen to review the financial results.

Stephen?

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

Total net revenue for Q1 was $4.6 million compared with $8.1 million in the same period last year. The main impact year-over-year was lower licensing revenue of $2.8 million versus $6.9 million last year caused by a decline in prescriptions for Absorica.

In addition to the impact of reduced prescriptions, as Rob discussed, royalty revenue was affected by a reduction in shipments from Cipher's partner to their distributors as inventory levels were adjusted to reflect the previously mentioned decrease in demand. We expect this to normalize in the second quarter.

Licensing revenue from Lipofen and the authorized generic was $0.5 million, down from $1.2 million in the comparative period. Product revenue increased by 45% in the quarter, led by Epuris, which recorded revenue of $1.2 million in the quarter, up 27% over last year's first quarter.

Other products increased to $0.4 million compared with $0.1 million last year. Operating expenses increased in the first quarter to $5.8 million from $3.5 million in Q1 2017.

The increase is related to a $1.8 million noncash impairment charge for Dermadexin and Pruridexin. In addition, SG&A expenses increased by $0.5 million related to $0.4 million of transaction costs incurred in executing the 4 transactions in 2018.

In terms of other expenses, the refinancing of our debt in 2017 has resulted in significantly lower interest costs. Our profitability metrics were also affected by lower licensing revenue.

Adjusted EBITDA for Q1 2018 increased to $1 million compared to $5.1 million in Q1 2017, and we recorded a small net loss from continuing operations of $1 million compared with the loss from continuing operations of $1.6 million in the comparative period. Our balance sheet remains strong, and we finished the quarter with cash of $28 million compared with $28.2 million at year-end.

We invested in the $5 million upfront payment for TRULANCE and made a scheduled $1.7 million debt payment to CIBC in the quarter to lower our outstanding debt to $16.5 million. As Rob mentioned, we expect to close the Cardiome transaction this quarter, which we financed mainly from cash on hand.

In summary, between our cash balance, our debt capacity and our cash flow generation, we continue to be in a strong financial position to deliver on our growth strategy. I will now turn the call back to Rob for his closing comments.

Thanks, Stephen. At Cipher's core is a profitable business with strong positive cash flows, positive EBITDA, a clean balance sheet and solid financial position to support our future growth prospects.

With robust cash flows over the next several years, we are equipped with non-dilutive financing to drive our growth, and we've been putting that capital to good work. With our recent transaction activity, Cipher's product pipeline has been transformed with multiple late-stage assets that have a very near-term commercial potential.

In 2018, we expect to close the Cardiome acquisition, launch Brinavess commercially, file New Drug Submissions for TRULANCE and Eskata, and obtain Health Canada approval for Xydalba. In summary, we have significant opportunity to enhance the values Cipher provides to investors, and our team remains focused on propelling Cipher forward by executing our plan.

Specifically, our focus is on driving organic growth in our Canadian commercial business, achieving key transaction milestones to unlock value that they brought to the company in these transactions and building on our business development momentum and increasing our investment to drive deal flow and transaction activity. These are exciting times for Cipher, and we look forward to reporting on our progress against these catalysts and milestones for the balance of 2018.

We'd now be pleased to take your calls. Operator?

Good morning Rob and Stephen. Just wondering, I had actually two questions.

One is are you going to be adding any more sales reps to market the Cardiome products that you're getting? And then the second one is, you've been pretty active on the BD side and just based on what you're currently reviewing, do you expect that trend to continue in 2018?

Hey, good morning Andrea. Thanks for your question and your interest and we appreciate it.

Yeah, so in terms of scaling for the hospital segment, we certainly see this as a very attractive segment for Cipher to build into. It is most clearly and definitely a different segment in the dermatology business that we're in, and so we will indeed be building some commercial structure to support our entry into the hospital business.

Both myself and Chris Watters, our VP of Corporate Development, have won businesses in the Canadian hospital sector. We love this area.

We think it's high-growth sector with some really new launches around entry and access and being able to drive growth. Once you're in that sector, and we think with this portfolio of acute care products, it gives us a real strong foothold to make a nice good entry into this area.

In terms of your second question around business development activity, so clearly we're pleased with the results thus far, but we're not satisfied with respect to the number of transactions we've done and the quality of transactions we've done has been awesome, and we want to continue to do those high-quality transactions that we think will create value. So we're not sort of set at the end.

One of our three point execution plan is to sort of redouble our efforts again on business development, not taking our foot off the gas pedal in that regard, continuing to invest and continuing to pull-through good transactions and have our differentiated products and create value for Cipher in the long game over the long term. Hopefully, that answers your question.

It does, yeah. Thanks.

Thanks Rob.

Hi, good morning. I'm on the line for Dave Martin.

I've got a couple of questions on the TRULANCE market, if you will. Of the one in four Canadians, who suffer from constipation, how many do you think would fit into these diagnoses of IBS-C and CIC?

And what's the approximate split between the two indications, given that there's likely to be more competition in the IBS-C space? And my second question would be Constella, the main composition of matter patent goes off in 2024.

Do you model generic pressure in the market for yours from TRULANCE launch assuming an early 2020 launch? So if this is the case, do you think that it's sufficient time for you to reach peak sales, given that it would be a new market for Cipher?

Hey, thanks for your question. So we're going to take the first one around TRULANCE market.

But can I ask you to repeat the second question because we didn't catch the product that you're enquiring about?

It's just - again, about TRULANCE. So Constella goes off patent in 2024, so do you model generics within four years of TRULANCE being launched, so in that case do you think that's sufficient time for you to reach peak sales?

Alight, okay. So I'll take the second part of that question, and Chris is going to make a comment with respect to market size.

Yeah, so I think it's important when you bring up Constella, which is the market leader, and if it's facing a generic competition in the future? We certainly believe that this market will maybe eroded from a price perspective, but with volume perspective there will be lots of patients for us to access.

We'd also believe that we have sufficient time with respect to TRULANCE marketing plan in Canada for both indications to reach peak sales, and we're very confident that we've got enough time to invest adequately to compete in this market and win market share rather quickly. And I'll ask Chris to comment on the market dynamics.

Yes. For both IBS-C and CIC, total market is about 9 million Canadians who suffer from those two indications.

We don't have actual data on number of patients that actually consult for clinicians. We do know though that there are majority of patients out there that do not consult physicians.

So the opportunity we see in this marketplace, patients who are seeking therapy as well as currently patients that are not seeking therapy that don't go to and seek treatment.

Okay, thank you.

Thanks, Prasath.

Thanks, again, for joining us this morning. We appreciate your interest.

And we are hosting our Annual General Meeting today at 11o'clock in Toronto and the details are on our website. Thanks, again.