Cipher Pharma - Potential Multibagger in Toenail Fungus - CPH.TO
The infection has spread to me
TL;DR
There’s a summary of the research near the end as well, if you want more info but don’t want to read the whole thing.
Credit:
I found @DakotaTwits tweets very helpful and Jake LaMotta’s write-ups informative.
Thanks to those guys for pointing me in the right direction, now let’s dive in.
Introduction:
Cipher’s stock has had a remarkable year, rising from ~$3.30 to ~$8.50 at time of writing.
This is more remarkable considering sales and operating income are mostly flat:
What’s going on? The answer to that is toenail fungus.
The Toenail Fungus Story
Cipher owns the Canadian rights to a topical nail fungus treatment developed by Moberg Pharma, MOB-015. This matters because the Canadian market for drugs treating onychomycosis (nail fungus) is, at time of writing, $80-90M CAD and 90-95% dominated by a drug that doesn’t really work, Jublia. Note that Cipher’s sales in 2023 were ~$26M CAD (they report in USD), so disrupting a market three to four times the size of their current business is very exciting.
Moreover, the IQVIA, which estimates the market size for onychomycosis, measures by prescriptions written, not by how by how many people have nail fungus. Notably, only 20% of people with toenail fungus are getting treatment for it. Put another way, for every one person who is getting treatment for their nail fungus, there are four who are not, meaning the size of the market may be dramatically underestimated. Cipher could grow three to four times in just the current market, but what if the market itself grew by three to four times?
That’s the story that’s got people excited.
Details
There are some details here that investors need in order to assess the probabilities and extent MOB-015 can take over from the incumbent onychomycosis treatment and for the market to grow.
Detail #1 – How Effective is MOB-015?
Legacy competitors are not competition because they usually involve filing down the nail, soaking it in urea, and applying a cream daily for a year or taking an oral anti-fungal that can interact with other medications, which is a problem because many people with toe nail fungus are older and take meds.
Jublia, the incumbent drug, is a big improvement because it can be applied directly to the nail once a day, doesn’t require filing or urea, and doesn’t risk drug interactions. Another competitor is entering the Canadian market in 2025 through Medexus, PoliChem’s P-0358. It is also a topical treatment. We can compare these drugs to MOB-015 based on results from their clinical trials:
For links to where I got these data here is P-0358 , MOB-015’s 2019 study, MOB-015’s press release about their 2020 study, and Jublia’s summary of their studies.
P-0358 takes the longest and is the worst at restoring the nail to its original appearance (complete cure). Jublia is the worst at getting rid of the fungus (myco cure) but has competitive timeframe and comparable complete cure rates.
Cipher’s licensed product, MOB-015 is the best. It heals the fungus three out of four times, far better than Jublia’s ~50%, while its complete cure rate is better but comparable to Jublia’s. Notably, MOB-015’s mycological cure rate after 12 weeks is around that of Jublia’s after 48 weeks. MOB-015 works better and faster than the incumbent drug at curing the fungus and is comparable at returning the nail to normal appearance. All this is done with minimal side effects.
Cipher’s management estimates MOB-015 can take 90% market share of the Canadian market. I look at these data and wonder if that might be optimistic. Though the myco cure rate is impressive, treating nail fungus is usually pursued for superficial reasons; people want their nails to look normal as soon as possible. I would love to see the complete cure rate higher for MOB-015 before I felt comfortable assuming they could take 90% market share.
Moberg Pharma is currently conducting a study that addresses exactly that:
They are testing changing the dose to avoid or decrease a discoloration effect on the nail the drug causes. Moberg Pharma is doing this because they want to strengthen the drug’s ability to completely cure the nail and provide clinical evidence. The results come out in early 2025. If the forthcoming phase three trial shows evidence that MOB-015 can completely cure onychomycosis at rates much higher than Jublia, that would be very beneficial to Cipher. There is a risk it does not do that, however.
Detail #2 – Is approval a sure thing? When does it come to market?
MOB-015 is not yet approved in Canada, and no application has yet been filed as they are waiting for the results of the previously mentioned trial to bolster the numbers a bit. There is the possibility that the drug doesn’t get approved, and the hype is for nothing.
The probability of MOB-015 not getting approved in Canada is fairly low, however. This is because, firstly, the latest trial is just to improve the product, not to test viability. As we saw above, the drug works better than current products on the market and with limited side effects.
Also, MOB-015 has already launched in Sweden and is recommended for approval in thirteen other European countries.
The probability Canada approves MOB-015 is very high, in my opinion.
The timeline to commercialization is less certain, though management estimates they will be selling it in Canada by 2026. Lots can happen though, and I wouldn’t bet on it being accurate, but for long-term investors six months here and there probably doesn’t matter.
Detail #3 – How much can the market grow?
This is the question that has given me the most trouble. MOB-015 is better than competitors and is likely to be approved and later commercialized. But why do only 20% of people with nail fungus seek treatment? To what extent could the existence of a more efficacious product not just beat out competitors for existing prescriptions, but also cause more people to get treatment? Can MOB-015 grow the addressable market?
The early results from Sweden are very positive. It sounds like demand for the product is there. Whether that is from new customers or just people switching treatments, I am not sure. If you have any insights you feel like sharing, please reach out.
This is an important question for investors because the return profile of Cipher stock is enhanced quite dramatically if they can not only grow their share of the pizza, but also the size of the pizza itself. More on returns later though.
Factors that aren’t MOB-015
There is a lot more to Cipher than MOB-015, though it is justifiably the reason many are excited about the stock.
The first such thing is that the existing business prints cash. They make $1M CAD in operating income a month at a margin of almost 50%. Much of this money comes from licensing of an acne medication sold in the states under the name Absorica and in Canada as Epuris. Epuris is growing moderately while Absorica is declining moderately, balancing each other out, resulting in very consistent sales and operating income.
Because of these consistent sales and high margins, Cipher has an impressive cash pile. At time of writing CPH has almost $40M CAD and no debt, or $1.60 per share of net cash. They also have a credit facility with RBC for $35M USD that is untapped. In other words, management has tons of liquidity and huge optionality.
Thus far, with the money they’ve bought back shares in a Substantial Issuer Bid (SIB) at around $4.50 a share and have an ongoing NCIB (Normal Course Issuer Bid) for up to 10% of shares outstanding. Furthermore, in the most recent earnings call, management indicated that they are in advanced stages of making a “transaction:”
Large transactions, especially transformative ones, can put investors on edge because if management gets it wrong, the whole thesis could be wrecked. It is therefore important to know the attitude of management.
In a past interview with Smallcap Discoveries CEO Craig Mull and CFO Bryan Jacobs said they are most interested in NASDAQ-listed companies with developed products, and/or “legacy” assets that are cash flowing with competitive advantages. They even have plans to initiate a growing dividend when they feel it appropriate. This is a different attitude to most biotech/pharma businesses.
When Brian Mull took over as CEO in 2019 (whose family owns 40% of the shares), the goal was to make Cipher a non-speculative, cash-flowing business and less a science project. He has thus far succeeded. As a result, I think the chances of a “transformative acquisition” being value accretive are higher than value destructive, though this is still a risk.
They also have several other products in the pipeline, the most notable aside from MOB-015 is Piclidenoson, a drug for plaque psoriasis. There is a comprehensive write-up here:
I won’t get into it as it doesn’t come into the picture for at least 4-5 years, but the Canadian plaque psoriasis market, according to Cipher management, is around $45M CAD though, so it may eventually move the needle for Cipher.
To sum, in addition to MOB-015, Cipher is printing money with its existing business and using the resulting cash pile to buyback shares, may use the cash to buy a company or asset(s) soon, may use it to pay a dividend in the more distant future, and has more products in the pipeline.
Valuation and Return Estimates
There is a lot to factor in here, much of which is pretty uncertain, so I’m going to do my best to provide a reference case and some scenarios, then let investors decide for themselves.
We start with financial projections provided by the company when they applied for the SIB.
The key points are that management expects margin expansion (45% to 60%), MOB-015 to start generating sales in 2026, and MOB-015 to have replaced competitor Jublia by 2030. I used this to inform my own model:
Despite conservative assumptions, operating income per share looks like it could quintuple by 2030. With a multiple of ten on that $2.50 per share of operating income, we get a $25 stock in 2030, which works out to a return of 17% annually if investors bought today at ~$8.50.
Given that this is a small cap with drug approval and roll-out risk (though much less than others), a 15-20% possible return is fair compensation for the risk an investor is taking by investing in CPH.TO at current prices. I understand why the stock has stalled out at the ~$8.50 level.
Personally, I am finding stocks with less risk that offer similar projected returns, so do not find the above scenario overly compelling, unless I were to put a lot of trust in management to do wonders with the cash pile.
What I do find compelling is what could happen if the treatment rate went above 1/5 to 2/5 or 3/5 toenail fungus sufferers. What happens if an effective treatment increases the size of the addressable market? I test that out below:
Personally, I look at this table and think that there is a thick right tail in this stock (higher probability of something unexpectedly good happening) that might take CPH from a good stock to a great stock. For example, if the market doubles to $200M CAD, and MOB-015 does dominate it (say 80% market share) then just the base business plus MOB-015 will generate ~$4.84 per share of operating income for Cipher, almost double the base case of ~$2.50.
The probability of dramatically better results than the market is expecting improves when we consider that I used a 60% operating margin which may be conservative for 2030, the base business will make $1M CAD a month for the intervening six years, Cipher has more products in the pipeline than just MOB-015, and could acquire more operating income with its big cash pile.
To put all this granularity into perspective, there is a higher-than-expected probability that Cipher’s 2030 operating income per share could be more than its current share price - a good deal. Put any multiple you want on that, and you have a winner. This possibility may make it worth owning the stock, even though it is already up 150%.
That is what I take away from this discussion anyways, you can let me know if I am out to lunch in the comments or via email.
Summary
MOB-015, a new treatment for toenail fungus, is a huge growth opportunity for Cipher.
MOB-015 is very likely to be approved.
MOB-015 is demonstrably better than competitors.
Assuming approval, commercial roll-out will not happen until at least 2026.
Cipher is pricing in a stable base business plus MOB-015 being a moderate success.
There is a lot that that is not priced in, which, if it goes right, would generate a better-than-fair return for shareholders:
The ongoing phase three trial comes out with better-than-expected results (though the opposite could happen too).
MOB-015 ends up dominating the Canadian market (90%+ market share).
MOB-015 (and/or something else) causes more than just 20% of people with nail fungus to get prescriptions – the market for the product grows.
Management does huge buybacks and/or dividends.
Management makes accretive M&A decisions (though the opposite could happen as well) with its large cash pile.
Cipher’s other products and pipeline contribute to growth.
Conclusion
Despite the run up in the last year, at the current price of around $8.50, investors are still buying a reasonable return, with a higher-than-normal probability of getting a phenomenal return.
It was obviously better 150% ago when MOB-015 was basically a free option, but the potential for CPH.TO to be a many multi-bagger is still there. The main difference is that a logical and conservative set of assumptions for MOB-015 are now baked in. Investors must do a little more work now.
The main difference to me personally, is I could not allocate as much to it as I would have, had if I found out about it at $4 a share.
I own no stock yet as I would like to better understand why only 20% of people with onychomycosis get it treated and am curious to see the results of the ongoing study testing MOB-015’s complete cure rate.
Strong writeup.
I will say that once the fungus is dead and application of the medicine is ceased, ultimately the nail will grow to look normal. The trouble is in eliminating the fungus entirely. The hydration effect leaves a temporary discoloration of the nail but is ultimately not impacting the development or look of new nail.
Nice write-up. I think the likelihood of them doing something poor with the excess cash is low given the high insider ownership. But I am biased.