Cipher reports fiscal 2008 year-end results
Toronto Stock Exchange Symbol: DND
MISSISSAUGA, ON, Feb. 18 /CNW/ - Cipher Pharmaceuticals Inc. (TSX: DND)
today announced its financial and operational results for the fourth quarter
and fiscal year ended December 31, 2008.
Fiscal 2008 Summary
-------------------
- Total revenue of $1.5 million, driven by growing sales of Lipofen(R)
and initial contribution from CIP-ISOTRETINOIN licensing agreement.
- Entered into a definitive development, distribution and supply
agreement with Ranbaxy Pharmaceuticals Inc. ("Ranbaxy") for CIP-
ISOTRETINOIN in the United States.
- Solid balance sheet at year end with cash of $9.9 million and no debt
at year end.
- Strengthened management team with the appointment of John MacInnis as
Vice President, Portfolio Development and Licensing.
- Subsequent to year end, received tentative FDA approval for CIP-
TRAMADOL ER for distribution in the United States.
"With one product on the market, two others at the late stages of the
development and approval process, a solid balance sheet and a strong core
management team, we have built the foundation for sustainable success," said
Larry Andrews, President and CEO of Cipher. "Achieving our second commercial
partnership in the U.S. was a major milestone in 2008, and we believe Ranbaxy
is an excellent partner to support our isotretinoin product. As Kowa expands
its sales force, we expect continued growth in Lipofen(R) royalties, creating
a steadily increasing revenue stream to offset our operating costs. Looking
ahead, we are in a solid financial position from which to build our pipeline
this year with novel products."
Financial Review
----------------
Total revenue in 2008 was $1.5 million, compared with $0.5 million in
2007. Revenue from Lipofen(R) totalled $1.3 million in 2008, reflecting the
continued market penetration of Lipofen(R) as Kowa expands its sales force.
Revenue from CIP-ISOTRETINOIN was $0.2 million in 2008, which includes an
amortized portion of the US$1.0 million up-front payment from Ranbaxy for
CIP-ISOTRETINOIN. This is the first commercial revenue recorded for this
product.
Research and Development ("R&D") expenses for fiscal 2008 were $1.3
million, a decrease of $1.6 million compared with 2007. The reported amount
does not include reimbursements of $0.5 million from Ranbaxy related to
CIP-ISOTRETINOIN and is net of a $0.4 million tax credit received under the
Ontario Innovation Tax Credit program. Adjusting for these items, the total
R&D costs incurred in 2008 were $2.2 million, a decrease of $0.7 million for
the year, which reflects the advanced stage of development of the Company's
three current products. Operating General and Administrative ("OG&A") expenses
for fiscal 2008 were $3.6 million, a decrease of $0.6 million or 15% compared
with 2007. The decrease in OG&A reflects prudent management of OG&A expenses
in general, as well as the simplification of the corporate structure as a
result of the voluntary wind-up of the Company's three subsidiaries. The loss
for the year ended December 31, 2008 was $3.2 million ($0.13 per basic and
diluted share), a decrease of 50% compared with the loss of $6.4 million
($0.27 per basic and diluted share) in fiscal 2007. The improved performance
in 2008 was primarily a result of increased revenue generated from the
Lipofen(R) U.S. distribution agreement and reduced R&D expenditures during the
year.
In Q4 2008, Cipher recorded licensing revenue of $0.4 million, compared
with $0.2 million in Q4 2007. Fourth quarter R&D expenses were nil, net of
reimbursed R&D costs of $0.2 million, compared with R&D expenses of $0.9
million in Q4 2007. OG&A expenses for Q4 2008 were $0.9 million, compared with
$1.0 million in the same period last year. Loss for the three months ended
December 31, 2008 was $0.5 million ($0.02 per basic and diluted share),
compared with a loss of $1.6 million ($0.07 per basic and diluted share) in
the same period last year.
The Company's financial position remained solid at year-end. As at
December 31, 2008, Cipher had cash of $9.9 million, compared with $11.0
million as at December 31, 2007.
Product Update
--------------
In July 2007, Cipher entered into a licensing and distribution agreement
with ProEthic Pharmaceuticals under which ProEthic was granted the exclusive
right to market, sell and distribute Lipofen(R) (Fenofibrate) in the United
States. In Q3 2008, ProEthic was acquired by Kowa Company, Ltd. and changed
its name to Kowa Pharmaceuticals America, Inc. ("Kowa"). During 2008,
Lipofen(R) monthly prescriptions showed steady growth, and Cipher expects this
trend to continue as Kowa increases penetration of the primary care physicians
in its targeted regions and expands its sales force. Since the Kowa
acquisition, the number of sales reps increased to 100, with further expansion
planned in the first half of 2009.
During the third quarter of 2008, Cipher achieved a major milestone with
the completion of a distribution and supply agreement with Ranbaxy
Pharmaceuticals Inc. ("RPI"), a wholly owned subsidiary of Ranbaxy
Laboratories Limited, under which Cipher granted RPI the exclusive right to
market, sell and distribute CIP-ISOTRETINOIN in the United States. Cipher
received an initial upfront milestone payment of US$1 million. The agreement
includes additional pre- and post-commercialization milestone payments of up
to US$23 million, contingent upon the achievement of certain milestone
targets. Once the product is successfully commercialized, Cipher will also
receive a royalty in the mid-teens on net sales. In addition, Ranbaxy will
reimburse Cipher for all costs associated with the remaining clinical studies
required to obtain FDA approval, up to a predetermined cap. Any additional
development costs associated with initial FDA approval will be shared equally.
During the second half of 2008, Cipher and its advisors met with the FDA
regarding the appropriate design of a safety trial for CIP-ISOTRETINOIN, which
the FDA has previously requested in its approvable letter. The Company expects
to finalize the study protocol shortly under a Special Protocol Assessment
("SPA") and plans to begin trial enrolment in Q2 2009. In Q4 2008, another
important milestone was reached with notice that the United States Patent and
Trademark Office issued a patent for CIP-ISOTRETINOIN.
In May 2007, Cipher received an approvable letter from the FDA pertaining
to its NDA for CIP-TRAMADOL ER, the Company's extended-release formulation of
tramadol. In December 2007, Cipher announced that it had appealed the position
taken by the FDA using the FDA's formal dispute resolution process. In the
written response, the Acting Director of the Office of Drug Evaluation II,
Center for Drug Evaluation and Research supported the original approvable
action. During Q2 2008, Cipher submitted a revised NDA to the FDA, which the
Company concluded was the most expeditious path to resolve the regulatory
concern raised by the FDA. Cipher's revised NDA was submitted as a 505(b)(2)
application and included data from additional pharmacokinetic studies
conducted by the Company comparing CIP-TRAMADOL ER to Ultram(R) ER.
In February 2009, the Company received tentative approval from the FDA.
While the product meets all the FDA's requirements for manufacturing quality,
clinical safety and efficacy, the Company must resolve certain patent issues
associated with the reference product, Ultram(R) ER, before CIP-TRAMADOL ER is
commercialized. Since there are issued U.S. patents for the approved product
held by a third party, Cipher was required to certify to the FDA concerning
any patents listed in the FDA's Orange Book publication at the time of
submission. Cipher's application contained a paragraph III certification
acknowledging that the listed patent had not expired and that final approval
would be sought after patent expiration in 2014. A paragraph IV certification,
which states that the listed patent is invalid, unenforceable, or will not be
infringed by the manufacture or sale of the drug, may trigger patent
infringement litigation and a stay of up to 30 months under the Hatch-Waxman
Act. To date, this certification has not been filed.
Out-licensing discussions with potential commercial partners are ongoing.
Notice of Conference Call
-------------------------
Cipher will hold a conference call today, February 18, 2009, at 8:30 a.m.
(ET) to discuss its financial results and other corporate developments. To
access the conference call by telephone, dial 416-644-3414 or 1-800-733-7571.
A live audio webcast of the call will be available at www.cipherpharma.com.
The webcast will be archived for 90 days.
About Cipher Pharmaceuticals Inc.
Cipher Pharmaceuticals is a drug development company focused on
commercializing novel formulations of successful, currently marketed molecules
using advanced drug delivery technologies. Cipher's strategy is to in-license
products that incorporate proven drug delivery technologies and advance them
through the clinical development and regulatory approval stages, after which
the products are out-licensed to international partners. Because Cipher's
products are based on proven technology platforms applied to currently
marketed drugs, they are expected to have lower approval risk, shorter
development timelines and significantly lower development costs. The Company's
lead compound, CIP-FENOFIBRATE, received final approval from the U.S. Food and
Drug Administration and Health Canada in the first quarter of 2006. The
product is being marketed in the United States by Kowa Pharmaceuticals America
under the label Lipofen(R). In addition, Cipher is developing formulations of
the pain reliever tramadol (tentative FDA approval in February 2009) and the
acne treatment isotretinoin (FDA approvable letter in April 2007).
Cipher is listed on the Toronto Stock Exchange under the symbol 'DND' and
has approximately 24 million shares outstanding. For more information, please
visit www.cipherpharma.com.
Forward-Looking Statements
Statements made in this news release, other than those concerning
historical financial information, may be forward-looking and therefore subject
to various risks and uncertainties. Some forward-looking statements may be
identified by words like "may", "will", "anticipate", "estimate", "expect",
"intend", or "continue" or the negative thereof or similar variations. Certain
material factors or assumptions are applied in making forward-looking
statements and actual results may differ materially from those expressed or
implied in such statements. Factors that could cause results to vary include
those identified in the Company's Annual Information Form and other filings
with Canadian securities regulatory authorities, such as the applicability of
patents and proprietary technology; possible patent litigation; regulatory
approval of products in the Company's pipeline; changes in government
regulation or regulatory approval processes; government and third-party payer
reimbursement; dependence on strategic partnerships for product candidates and
technologies, marketing and R&D services; meeting projected drug development
timelines and goals; intensifying competition; rapid technological change in
the pharmaceutical industry; anticipated future losses; the ability to access
capital to fund R&D; and the ability to attract and retain key personnel. All
forward-looking statements presented herein should be considered in
conjunction with such filings. Except as required by Canadian securities laws,
the Company does not undertake to update any forward-looking statements; such
statements speak only as of the date made.
Cipher Pharmaceuticals Inc.
Balance Sheets
(in thousands of dollars)
As at
December 31, December 31,
2008 2007
ASSETS
Current assets
Cash $ 9,881 $ 10,961
Accounts receivable 512 1,396
Income taxes receivable 6 128
Prepaid expenses and other current assets 380 56
Current portion of loan receivable (note 5) 608 -
-------------------------------------------------------------------------
11,387 12,541
Property and equipment, net (note 4) 147 208
Loan receivable (note 5) 717 1,377
Intangible assets, net (note 6) 4,126 4,592
-------------------------------------------------------------------------
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$ 16,377 $ 18,718
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LIABILITIES
Current liabilities
Accounts payable and accrued liabilities $ 1,178 $ 1,059
Current portion of deferred revenue 1,177 790
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2,355 1,849
Deferred revenue 994 1,192
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3,349 3,041
-------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Share capital (note 7) 49,948 49,948
Contributed surplus (note 8) 31,613 31,032
Deficit (68,533) (65,303)
-------------------------------------------------------------------------
13,028 15,677
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$ 16,377 $ 18,718
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The accompanying notes are an integral part of these financial statements
Cipher Pharmaceuticals Inc.
Statements of Operations and Comprehensive Loss
(in thousands of dollars, except per share amounts)
For the year ended
December 31, December 31,
2008 2007
(Consolidated
- note 1)
Revenues
Licensing revenue $ 1,543 $ 311
Product sales - 227
-------------------------------------------------------------------------
1,543 538
-------------------------------------------------------------------------
Expenses
Cost of goods sold - 171
Research and development (note 9) 1,303 2,926
Operating, general and administrative 3,565 4,183
Amortization of property and equipment 71 50
Amortization of intangible assets 466 466
Recovery of legal fees and court
costs (note 10) (176) -
Interest income (456) (813)
-------------------------------------------------------------------------
4,773 6,983
-------------------------------------------------------------------------
Loss and comprehensive loss for the year $ (3,230) $ (6,445)
-------------------------------------------------------------------------
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Basic and diluted loss per share (note 12) $ (0.13) $ (0.27)
-------------------------------------------------------------------------
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The accompanying notes are an integral part of these financial statements
Cipher Pharmaceuticals Inc.
Statements of Deficit
(in thousands of dollars)
For the year ended
December 31, December 31,
2008 2007
(Consolidated
- note 1)
Deficit, beginning of year $ (65,303) $ (58,858)
Loss for the year (3,230) (6,445)
-------------------------------------------------------------------------
Deficit, end of year $ (68,533) $ (65,303)
-------------------------------------------------------------------------
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The accompanying notes are an integral part of these financial statements
Cipher Pharmaceuticals Inc.
Statements of Cash Flows
(in thousands of dollars)
For the year ended
December 31, December 31,
2008 2007
(Consolidated
- note 1)
Cash provided by (used in)
Operating activities
Loss $ (3,230) $ (6,445)
Items not affecting cash
Amortization of property and equipment 71 50
Amortization of intangible assets 466 466
Stock-based compensation expense 581 659
Imputed interest (note 5) (136) (191)
-------------------------------------------------------------------------
(2,248) (5,461)
Net change in non-cash operating
items (note 13) 990 704
Drawdown of loan receivable (note 5) 188 800
-------------------------------------------------------------------------
(1,070) (3,957)
-------------------------------------------------------------------------
Investing activities
Purchase of property and equipment (10) (159)
-------------------------------------------------------------------------
Decrease in cash (1,080) (4,116)
Cash, beginning of year 10,961 15,077
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash, end of year $ 9,881 $ 10,961
-------------------------------------------------------------------------
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The accompanying notes are an integral part of these financial statements
Cipher Pharmaceuticals Inc.
Notes to Financial Statements
December 31, 2008
(in thousands of dollars, except per share amounts)
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in accordance with
Canadian generally accepted accounting principles.
Basis of presentation
The prior year statements of operations and comprehensive loss,
deficit and cash flows were presented on a consolidated basis and
included Cipher Pharmaceuticals Inc. (the "Company") and its wholly-
owned subsidiaries Cipher Canada Inc., Cipher Holdings (Barbados)
Ltd. and Cipher Pharmaceuticals Ltd. There was no activity in the
three wholly-owned subsidiaries during 2008 and on October 31, 2008
the three companies were wound up by way of voluntary dissolution.
Significant accounting policies used in the preparation of these
financial statements are as follows:
Translation of foreign currencies
Revenues and expenses denominated in foreign currencies are
translated into Canadian dollars using the exchange rate in effect at
the transaction date. Monetary assets and liabilities are translated
using the rate in effect at the balance sheet date and non-monetary
items are translated at historical exchange rates. Related exchange
gains and losses are included in the determination of the loss for
the year.
Use of estimates
The preparation of these financial statements requires management to
make estimates and assumptions that could affect the reported amounts
of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting
periods presented. Significant areas requiring the use of management
estimates include intangible assets and income taxes. By their
nature, these estimates are subject to measurement uncertainty.
Actual results could differ from the estimates and assumptions.
Property and equipment
Property and equipment are recorded at cost less accumulated
amortization. Amortization is computed using the straight-line method
using the following estimated useful lives of the assets or lease
terms:
Computer equipment 3 years
Computer software 3 years
Furniture and fixtures 5 years
Leasehold improvements over the term of the lease
Impairment of long-lived assets
Long-lived assets are tested for recoverability whenever events or
changes in circumstances indicate the carrying value may not be
recoverable. An impairment loss is recognized when the carrying
amount of a long-lived asset exceeds the sum of the estimated
undiscounted cash flows from the long-lived asset. An impairment loss
is measured as the amount by which the carrying amount of the long-
lived asset exceeds the estimated fair value.
Intangible assets
Intangible assets consist of marketing and other rights relating to
products and are initially recorded at cost. Intangible assets have a
finite life and are amortized using the straight-line method over
their estimated period of useful life, which is determined to be 3.5
years from the date of regulatory (generally, U.S. Food and Drug
Administration ("FDA")) approval for marketing the related product.
Intangible assets are reviewed for impairment when events or other
changes in circumstances indicate that the carrying amount of the
assets may not be recoverable.
Revenue recognition
The Company recognizes revenue from product sales contracts and
licensing and distribution agreements, which may include multiple
elements. The individual elements of each agreement are divided into
separate units of accounting, if certain criteria are met. The
applicable revenue recognition approach is then applied to each unit.
Otherwise, the applicable revenue recognition criteria are applied to
combined elements as a single unit of accounting.
Product sales - revenue from product sales contracts is recognized
when the product is shipped to the Company's customers, at which time
ownership is transferred.
Licensing revenues - for up-front licensing payments and pre-
commercialization milestones, revenue is deferred and recognized on a
straight-line basis over the estimated term that the Company
maintains substantive contractual obligations. Post-commercialization
milestone payments are recognized as revenue when the underlying
condition is met, the milestone is not a condition to future
deliverables and collectibility is reasonably assured. Otherwise,
these milestone payments are recognized as revenue over the remaining
term of the underlying agreement or the term over which the Company
maintains substantive contractual obligations. Royalty revenue is
recognized in the period in which the Company earns the royalty.
Amounts received in advance of recognition as revenue are included in
deferred revenue. Revenue from licensing and distribution agreements
is presented on a net basis.
Research and development
The Company conducts various research and development programs and
incurs costs related to these activities, including employee
compensation, materials, professional services and services provided
by contract research organizations. Research and development costs,
net of related tax credits, are expensed in the periods in which they
are incurred.
Income taxes
The Company uses the asset and liability method of accounting for
income taxes. Under this method, future tax assets and liabilities
are determined based on differences between the financial reporting
and income tax bases of assets and liabilities and are measured using
enacted or substantively enacted tax rates and laws that will be in
effect when the difference is expected to reverse. The Company
provides a valuation allowance for future tax assets when it is more
likely than not that some or all of the future tax assets will not be
realized.
Stock-based compensation
The fair value of stock options granted after October 1, 2002 is
recognized as compensation expense on a straight-line basis over the
applicable stock option vesting period. Stock-based compensation
expense is included in operating, general and administrative expense
in the statements of operations and contributed surplus in the
balance sheets. The consideration received on the exercise of stock
options is credited to share capital at the time of exercise.
Financial instruments
Financial instruments are measured at fair value except for loans and
receivables, held-to-maturity investments and other financial
liabilities, which are measured at cost or amortized cost. Gains and
losses on held-for-trading financial assets and liabilities are
recognized in net earnings in the period in which they arise.
Unrealized gains and losses, including changes in foreign exchange
rates on available-for-sale financial assets, are recognized in
comprehensive income until the financial assets are derecognized or
impaired, at which time any unrealized gains or losses are recorded
in net earnings.
The following is the basis of classification and measurement of the
Company's financial instruments:
- Cash is classified as held-for-trading and is measured at fair
value;
- Accounts receivable and loan receivable are classified as loans
and receivables and recorded at cost, which at initial
measurement corresponds to fair value. After initial fair value
measurement, they are measured at amortized cost; and
- Accounts payable and accrued liabilities are classified as other
financial liabilities. They are initially measured at fair value
and, if necessary, subsequent revaluations are recorded at
amortized cost.
2 ADOPTION OF NEW ACCOUNTING POLICIES
Effective January 1, 2008, the Company adopted the following new CICA
accounting standards: Section 3862, Financial Instruments -
Disclosures and Section 1535, Capital Disclosures.
CICA Section 3862, Financial Instruments - Disclosures, establishes
standards for the disclosure of financial instruments including
disclosing the significance of financial instruments and the nature
and extent of risks arising from financial instruments.
CICA Section 1535, Capital Disclosures, establishes standards for
disclosing aspects of the entity's capital management strategy. This
standard requires disclosure of both quantitative and qualitative
disclosures around the entity's objectives, policies and processes
for managing capital requirements and the consequences of non-
compliance.
The adoption of these new standards had no impact on the Company's
financial position or results of operations.
3 RISK MANAGEMENT
Financial risk management
In the normal course of business, the Company is exposed to a number
of financial risks that can affect its operating performance. These
risks are: credit risk, liquidity risk and market risk. The Company's
overall risk management program and prudent business practices
seek to minimize any potential adverse affects on the Company's
financial performance.
(i) Credit risk
Accounts receivable - the Company licenses its products to
distribution partners in major markets. The credit risk associated
with the accounts receivable pursuant to these agreements is
evaluated during initial negotiations and on an ongoing basis. There
have been no events of default under these agreements. As of
December 31, 2008, no accounts receivable balances were considered
impaired and $32 was considered past due.
Loan receivable - the loan receivable is repaid in annual instalments
over a five year period, with two instalments remaining as at
December 31, 2008. All prior instalments have been received on
schedule and there have been no events of default under the loan
agreement.
(ii) Liquidity risk
The Company has no long term debt with specified repayment terms.
Accounts payable and accrued liabilities are settled in the regular
course of business, based on negotiated terms with trade suppliers.
All components of the balance of $1,178 as at December 31, 2008 will
be settled in less than one year. The carrying value of the balances
approximate their fair value as the impact of discounting is not
significant.
(iii) Market risk
Currency risk - the majority of the Company's revenue and a portion
of its expenses are denominated in US currency. At December 31, 2008
the accounts receivable balance includes a total of US$338 and
accounts payable and accrued liabilities includes a total of US$478.
There is no active hedging program currently in place due to the
relatively short time frame for settlement of these balances. A 10%
change in the US/CDN exchange rate on the December 31, 2008 balances
would have had a $14 impact on net income.
Interest rate risk - the fair value of the loan receivable is based
upon a discounted cash flow method, whereby a risk premium is added
to the Bank of Canada risk-free interest rate. A 10% change in the
risk-free interest rate would not have had a significant impact on
imputed interest.
Capital risk management
Shareholders' equity is managed as the capital of the Company. The
Company's objective when managing capital is to safeguard its ability
to continue as a going concern in order to provide returns for
shareholders and to maintain an optimal capital structure to minimize
the cost of capital. In order to maintain or adjust the capital
structure, the Company may issue new common shares from time to time.
4 PROPERTY AND EQUIPMENT
The following is a summary of property and equipment as at
December 31, 2008:
December 31, 2008 December 31, 2007
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Accumulated Accumulated
Cost Amortization Cost Amortization
---------------------------------------------------------------------
Computer equipment $ 101 $ 79 $ 91 $ 58
Computer software 35 24 35 14
Furniture and fixtures 126 58 126 31
Leasehold improvements 67 21 67 8
---------------------------------------------
329 $ 182 319 $ 111
Accumulated amortization (182) (111)
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$ 147 $ 208
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5 LOAN RECEIVABLE
On February 28, 2005, the Company completed the sale of its wholly-
owned pharmaceutical research services business, Pharma Medica
Research Inc. (Pharma Medica). Consideration consisted of a cash
payment of $14,000 and a deferred payment of $4,000. The deferred
payment is non-interest bearing and is repayable in annual
instalments of $800 over a five year period. As the deferred payment
is non-interest bearing, it was recorded at its fair value of $3,112
based on a discount rate of 9%. Imputed interest of $136 has been
recorded on this deferred payment during the year ended December 31,
2008 ($191 during the year ended December 31, 2007). In accordance
with the terms of the deferred payment agreement, $800 of clinical
services purchased from Pharma Medica during 2007 were offset against
the annual payment that was due on January 30, 2008. During the year
ended December 31, 2008, $188 of clinical services purchased from
Pharma Medica have been offset against the next annual payment, which
is due on January 30, 2009.
6 INTANGIBLE ASSETS
During fiscal 2001, the Company entered into certain agreements with
Galephar Pharmaceutical Research Inc. ("Galephar") for the rights to
package, test, obtain regulatory approvals and market certain
products in various countries around the world. In accordance with
the terms of the agreements, the Company has acquired these
intangible rights through an investment in three separate series of
preferred shares of Galephar. The Company may be required to pay
additional amounts to Galephar in respect of the CIP-ISOTRETINOIN and
CIP-TRAMADOL ER intangible rights of up to $1,837 (US$1,500) if
certain future milestones are achieved as defined in the agreements.
These additional payments will be made in the form of additional
Galephar preferred share purchases. The recoverability of these
intangible rights is dependant upon sufficient revenues being
generated from the related products currently under development and
commercialization.
Upon receipt of FDA approval in January 2006, the Company began
amortizing the intangible rights related to CIP-FENOFIBRATE. As at
December 31, 2008, no other products have received FDA approval.
With regard to CIP-FENOFIBRATE, in July 2007 the Company entered into
a licensing and distribution agreement with Kowa Pharmaceuticals
America, Inc. ("Kowa"), formerly ProEthic Pharmaceuticals, Inc.,
under which Kowa was granted the exclusive right to market, sell and
distribute Lipofen in the United States. The Company received an up-
front licensing payment of US$2 million and, under the terms of the
agreement, could receive additional milestone payments of up to
US$20 million based on the achievement of certain net sales targets.
The Company also receives a royalty based on a percentage of net
sales. These elements are reflected in licensing revenue, which also
incorporates direct product-related expenses and amounts due to
Galephar, the Company's technology partner. Revenue from licensing
and distribution agreements is presented on a net basis. After
product-related expenses are deducted, approximately 50% of all
milestone and royalty payments received by the Company under the
agreement will be paid to Galephar. Lipofen was launched in the U.S.
market in September 2007.
The Company's US$2 million investment in Galephar preferred shares
related to CIP-FENOFIBRATE is being repaid by Galephar in a series of
quarterly payments. A total of US$800 has been received as at
December 31, 2008 and a further amount of US$199 was offset against
amounts owing to Galephar. These amounts are included in revenue over
the same period as up-front licensing payments are recognized.
In August 2008, the Company entered into a development, distribution
and supply agreement with Ranbaxy Pharmaceuticals Inc. ("Ranbaxy")
under which Ranbaxy was granted the exclusive right to market, sell
and distribute CIP-ISOTRETINOIN in the United States. Under the terms
of the agreement, the Company received an up-front licensing payment
of US$1 million and could receive additional pre- and post-
commercialization milestone payments of up to US$23 million, based on
the achievement of certain milestone targets. Once the product is
successfully commercialized, the Company will also receive a royalty
based on a percentage of net sales. In addition, Ranbaxy will
reimburse the Company for all costs associated with the clinical
studies required by the FDA to secure NDA approval, up to a
predetermined cap. Any additional development costs associated with
initial FDA approval will be shared equally. The Company is
responsible for all product development activities, including
management of the clinical studies required by the FDA to secure NDA
approval and is also responsible for product supply and
manufacturing, which will be fulfilled by Galephar. After product-
related expenses are deducted, approximately 50% of all milestone and
royalty payments received by the Company under the agreement will be
paid to Galephar.
The following is a summary of intangible assets as at December 31,
2008:
December 31, 2008 December 31, 2007
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Accumulated Accumulated
Amortization Amortization
Cost and Writedowns Cost and Writedowns
---------------------------------------------------------------------
CIP-FENOFIBRATE $ 3,014 $ 2,080 $ 3,014 $ 1,614
CIP-ISOTRETINOIN 1,883 426 1,883 426
CIP-TRAMADOL ER 2,161 426 2,161 426
------------------------------------------------
7,058 $ 2,932 7,058 $ 2,466
Accumulated
amortization and
writedowns (2,932) (2,466)
---------------------------------------------------------------------
$ 4,126 $ 4,592
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7 SHARE CAPITAL
Authorized share capital
The authorized share capital consists of an unlimited number of
preference shares, issuable in series, and an unlimited number of
voting common shares.
Issued share capital
The following is a summary of the changes in share capital from
December 31, 2006 to December 31, 2008:
Number of
common shares Amount
(in thousands) $
Balance outstanding - December 31, 2006 24,036 49,891
Options exercised during 2007 19 57
--------------------------
Balance outstanding - December 31, 2007
and December 31, 2008 24,055 49,948
--------------------------
--------------------------
Stock option plan
The following is a summary of the changes in the stock options
outstanding from December 31, 2006 to December 31, 2008:
Weighted
average
Number of exercise
options price
(in thousands) $
Balance outstanding - December 31, 2006 889 2.96
Options granted during 2007 274 3.90
Options exercised during 2007 (38) 1.90
Options cancelled during 2007 (127) 2.16
---------------
Balance outstanding - December 31, 2007 998 3.36
Options granted during 2008 483 0.78
Options that expired or were
cancelled during 2008 (105) 2.55
---------------
Balance outstanding - December 31, 2008 1,376 2.51
---------------
---------------
At December 31, 2008, 540,482 options were fully vested and
exercisable (309,741 at December 31, 2007).
During 2008, the Company issued 483,000 stock options under the
employee and director stock option plan, with exercise prices ranging
from $0.45 to $1.05, 25% of which vest on either February 28,
November 7 or December 3 of each year for the next four years,
commencing in 2009, and all of which expire in 2018. Total
compensation cost for these stock options is estimated to be $334.
This cost will be recognized over the vesting period of the stock
options.
The stock options issued during 2008 were valued using the Black-
Scholes option pricing model with the following assumptions:
Risk-free interest rate 2.27% - 3.14%
Expected life 10 years
Expected volatility 93% - 102%
Expected dividend Nil
The following is a summary of the outstanding options as at
December 31, 2008:
Expiry date Exercise Number of options (in thousands)
price --------------------------------------
$ Vested Unvested Total
January 11, 2012 1.09 125 - 125
September 17, 2014 2.35 125 - 125
March 23, 2016 4.12 100 100 200
June 28, 2016 4.00 90 90 180
August 8, 2016 4.33 10 10 20
September 13, 2016 2.90 34 35 69
March 9, 2017 3.90 56 168 224
February 28, 2018 1.05 - 213 213
November 7, 2018 0.45 - 180 180
December 3, 2018 0.50 - 40 40
--------------------------------------
540 836 1,376
--------------------------------------
--------------------------------------
8 CONTRIBUTED SURPLUS
The following is a summary of the changes in contributed surplus from
December 31, 2006 to December 31, 2008:
Amount
$
Balance - December 31, 2006 30,430
Options exercised during 2007 (57)
Stock-based compensation expense during 2007 659
------------
Balance - December 31, 2007 31,032
Stock-based compensation expense during 2008 581
------------
Balance - December 31, 2008 31,613
------------
------------
9 RESEARCH AND DEVELOPMENT
A total of $2,242 of research and development costs were incurred in
2008 ($2,926 in 2007). The research and development expense reflected
in the Statement of Operations is presented net of Ontario Innovation
Tax Credit ("OITC") program credits of $440 for qualifying research
and development expenditures for 2006 through 2008 and an amount of
$499 reimbursed by Ranbaxy. Under the terms of the agreement with
Ranbaxy, research and development costs incurred for clinical studies
required by the FDA to secure approval for CIP-ISOTRETINOIN are
reimbursed to the Company and as a result, there was a nil impact to
research and development expense with respect to these costs. There
were no OITC credits or reimbursements recorded in 2007.
10 RECOVERY OF LEGAL FEES AND COURT COSTS
On July 30, 2008, the Federal Court of Canada ruled in the Company's
favour and awarded a recovery of legal fees and court costs from
prior years in the amount of $176.
11 INCOME TAXES
The provision for income taxes differs from the amount computed by
applying the statutory income tax rate to the loss for the year. The
sources and tax effects of the differences are as follows:
For the year ended
December 31,
2008 2007
$ $
Statutory income tax rate of 33.5% applied
to loss for the year (2007 - 36.12%) (1,082) (2,328)
Permanent differences 57 253
Change in enacted income tax rates
and other items (599) (1,670)
Change in valuation allowance 1,624 3,745
-----------------------
Provision for income taxes - -
-----------------------
-----------------------
The significant components of future income tax assets are summarized
as follows:
As at
December 31,
2008 2007
$ $
Non-capital losses 10,776 9,864
Excess of tax value of property and
equipment over book value 49 27
SR&ED expenditure pool 3,466 3,206
Excess of tax value of intangible assets
over book value 7,581 7,513
Benefit of investment tax credits 2,057 1,694
Capital losses 93 -
Deductible share issue costs 127 190
Other temporary differences 487 518
-----------------------
24,636 23,012
Valuation allowance (24,636) (23,012)
-----------------------
- -
-----------------------
-----------------------
The Company has non-capital loss carry forwards of $37,200 as at
December 31, 2008 that expire in varying amounts from 2014 to 2028.
The Company has Scientific Research and Experimental Development
("SR&ED") expenditures of $11,900 which can be carried forward
indefinitely to reduce future years' taxable income.
The Company has approximately $2,600 of investment tax credits on
SR&ED expenditures that are available to be applied against federal
taxes otherwise payable in future years and expire in varying amounts
from 2013 to 2028.
12 LOSS PER SHARE
Loss per share is calculated using the weighted average number of
shares outstanding. The weighted average number of shares outstanding
for the year ended December 31, 2008 was 24,054,878 (for the year
ended December 31, 2007 - 24,049,174).
As the Company had a loss for each of the periods presented, basic
and diluted loss per share are the same because the exercise of all
stock options would have an anti-dilutive effect.
13 SUPPLEMENTAL CASH FLOW INFORMATION
The following is a summary of the changes in non-cash operating
items:
For the year ended
December 31,
2008 2007
$ $
Accounts receivable 884 (1,236)
Income taxes receivable 122 (33)
Prepaid expenses and other current assets (324) (24)
Accounts payable and accrued liabilities 119 15
Deferred revenue 189 1,982
-----------------------
990 704
-----------------------
-----------------------
14 COMPARATIVE FIGURES
Certain comparative figures for the previous year have been
reclassified to conform to current financial statement presentation.
%SEDAR: 00020415E
For further information: Craig Armitage, Investor Relations, The Equicom
Group, (416) 815-0700 ext 278, (416) 815-0080 fax, carmitage@equicomgroup.com;
Larry Andrews, President and CEO, Cipher Pharmaceuticals, (905) 602-5840 ext
324, (905) 602-0628 fax, landrews@cipherpharma.com
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