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
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                                   $    16,377   $    18,718
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    LIABILITIES

    Current liabilities
    Accounts payable and accrued liabilities       $     1,178   $     1,059
    Current portion of deferred revenue                  1,177           790
    -------------------------------------------------------------------------
                                                         2,355         1,849

    Deferred revenue                                       994         1,192
    -------------------------------------------------------------------------
                                                         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
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                                   $    16,377   $    18,718
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    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)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Basic and diluted loss per share (note 12)     $     (0.13)  $     (0.27)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    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)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    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
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    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
        ---------------------------------------------------------------------
                                          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)
        ---------------------------------------------------------------------
                                $  147                 $  208
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

    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
        ---------------------------------------------------------------------
                                         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
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

    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:

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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