Cipher Pharmaceuticals bought privately held American dermatology company Innocutis Holdings LLC for $45.5-million (U.S.) in cash, its fifth acquisition this year. Analysts say the deal speeds up the company’s growth strategy.Getty Images/iStockphoto
Investors hoping to keep making profits in the high-performing pharmaceutical space are eyeing dermatology-focused Cipher Pharmaceuticals Inc. and its aggressive growth-by-acquisition strategy.
Shares of the Mississauga-based company are regaining strength after the company recently announced its largest acquisition to date, expanding its footprint in the lucrative U.S. market.
Cipher bought privately held American dermatology company Innocutis Holdings LLC for $45.5-million (U.S.) in cash, its fifth acquisition this year. Analysts say the deal speeds up the company's growth strategy.
"The story is so different than what it was at this time a year ago," said Zacks Investment Research analyst Jason Napodano, who has a "buy" rating on Cipher. "They really have the potential now to take it to the next level."
Innocutis gives Cipher critical infrastructure to sell its products in the U.S., including a 31-person sales team and a handful of new products that treat ailments such as damaged nails and skin conditions such as acne and cold sores.
The deal also allows Cipher to seek Health Canada approval for drugs already approved by the U.S. Food and Drug Administration, which should help to boost its sales in Canada, said Euro Pacific Canada Inc. analyst Douglas Loe.
While investors may have reacted cautiously to the company's first few transactions this year, reflected in the recent sag in its share price, "Cipher now has a credible platform into which it can infuse other dermatology assets," said Mr. Loe, after recently raising his 12-month price target to $23 from $19.50. He also said the company has enough money to make more deals in future.
"We're encouraged by the measured pace by which Cipher is diversifying its core portfolio by adding both product and entire firms to existing operations," Mr. Loe said.
Among four analysts that cover the stock, three have a "buy" rating, while one says "hold," according to S&P Capital IQ. The analyst consensus price target for Cipher Pharmaceuticals over the next year is $18.56, which is about 40 per cent above where it's currently trading, at around $13.30.
The stock has traded between a low of $7.41 and a high of $19.52 in the past 12 months.
Cipher chief executive Shawn O'Brien, who took over the job last summer, said the company's growth plan is to keep acquiring companies in the dermatology space and to expand the market for its newly acquired and existing products, such as its Epuris medication to treat severe acne.
"We plan to remain highly acquisitive so that we can build a portfolio that can be seen as very valuable not only to investors, but also to the physicians and patients that we serve," said Mr. O'Brien in an interview. He also believes there's a lot of room for product innovation in the dermatology space.
Analysts say the risks for investors include Cipher's ability to pull off its recent acquisitions, as well as the increased competition in the pharmaceutical sector, especially in the U.S.
Cipher is also a thinly traded small-cap name, with a market valuation of about $345-million, which means trading can be volatile.
Laurentian Bank Securities analyst Joseph Walewicz has a "hold" on the stock and a $15.25 price target, believing the stock is fairly valued at its current level.
"From a valuation perspective … we feel the market is already pricing in the new acquisition," he said.
Bruce Campbell, portfolio manager at StoneCastle Investment Management Inc., said his company sold Cipher a few months ago to make room for cheaper name, Merus Labs International Inc.
StoneCastle also owns Concordia Healthcare Corp. as its biggest holding in the Canadian specialty pharmaceutical sector. He's considering buying Cipher again, given the growth expected from its recent acquisitions.
"We have our eyes on it and are watching to see how everything shakes out," Mr. Campbell said.