Opinions
Jason Donville
Cipher Pharmaceuticals Inc.
CPHR-Q
TOP PICK
Oct 24, 2014
Stock price when the opinion was issued
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Have a significant drug in the US that is doing extremely well. This is kind of growth by acquisition, but is interesting because in a lot of cases there really isn't an open bidding process for some of the drugs that come up for sale. It's all about personal relationships and the CEO of this company has some pretty good contacts. Earnings are expected to be pretty much unchanged in 2015. The real key is, can they acquire more drugs in order to grow.
(A Top Pick Oct 24/14. Down 33.71%.) They were in a bit of a jam in that they had one particularly strong product but didn’t have a sales force, so they acquired a company in the US to get them a sales force. He could see this was going to drop their earnings, so he sold his position.
CPH has a market cap of ~$109M and operates as a specialty pharmaceutical company. Sales have been fairly lumpy over the years, and have mostly declined, but it is free cash flow positive and repurchases some shares while mostly adding cash to its balance sheet. It has an expanding balance sheet, almost no debt, a good cash balance, and its valuation is decent at a 3.9X forward sales and 1.1X price to book multiple. It has seen a nice run-up so far this year - we would be comfortable with a small position, while being mindful of small-cap risks and position sizing.
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The founder management has returned after the company made missteps. They bought a good US company last year that has a good product they will bring to Canada and license to the world. They're growing earnings by 50-60% and improving margins at a cheap PE.
(Analysts’ price target is $16.70)
We are in an environment right now where pharmaceutical companies are very hot commodities. You either have to acquire things or you have to be acquired. This company is attractive in both respects. Have a great lead drug for teenage acne which is doing very well. Also, have a lot of cash. This could simultaneously be a very attractive acquisition or they could turn around and use that cash to buy other things in their product offering. They have a lot of options right now. His guess is that we are going to get reconciliation one way or another in the next six months. They are either going to buy a bunch of stuff or going to get a big pop in their rating or get taken out by somebody at a higher price. Trading at 13X earnings with about a 35% ROE.