Toronto Stock Exchange Symbol: DND

MISSISSAUGA, ON, May 12 /CNW/ - Cipher Pharmaceuticals Inc. (TSX: DND) today announced its financial and operational results for the three months ended March 31, 2011 ("Q1 2011").  The first quarter of 2011 represents the Company's first reporting period under IFRS.

Q1 2011 Summary

• Lipofen® royalty revenue increased by $0.2 million in Q1 2011 compared to Q1 2010.
• Strong balance sheet at quarter end with cash of $9.1 million and no debt.
• Subsequent to quarter end, completed the CIP-ISOTRETINOIN Phase III study.

"In the first quarter our team continued to make good progress on the CIP-ISOTRETINOIN safety study, which just finished on schedule with more than 900 patients included," said Larry Andrews, President and CEO of Cipher. "Lipofen® continues to provide a steady revenue stream as we prepare to launch our other two products in the U.S. and evaluate additional markets for these products."

Financial Review

Net revenue in Q1 2011 was $0.7 million, compared with $0.9 million in Q1 2010. Revenue from Lipofen® in Q1 2011 totalled $0.6 million, a decrease of $0.2 million compared to Q1 2010.  In 2010, the Company was still recognizing quarterly revenue on the original up-front licensing payment (received in 2007) from Kowa Pharmaceuticals America Inc. ("Kowa"), as well as a milestone payment received in 2009, both of which were being amortized over several quarters, ending in 2010. In Q1 2010, non-cash revenue recognized on these items totalled $0.4 million. Excluding these non-cash items, royalty revenue from Lipofen® increased by $0.2 million in Q1 2011 compared to Q1 2010.

Gross Research and Development ("R&D") expenditures for Q1 2011 were $1.7 million, a decrease of $2.4 million compared to Q1 2010. The year-over-year decrease reflects reduced spending on the CIP-ISOTRETINOIN clinical study, which was approaching completion at the end of Q1 2011.  The reported R&D amount of $0.5 million for Q1 2011 is net of reimbursed R&D costs related to the CIP-ISOTRETINOIN Phase III clinical study and the impact of R&D refundable tax credits recorded in the quarter, which together totalled $1.2 million.  Reported R&D expense in Q1 2010 was $0.3 million. In Q1 2011, the Company reached the contractual cap on the amount of R&D to be 100% reimbursed by its commercial partner for the CIP-ISOTRETINOIN clinical study. Going forward, 50% of the remaining study costs will be borne by Cipher. The Company's share of these additional R&D costs was $0.3 million during Q1 2011. Cipher expects its share of the additional R&D costs for the CIP-ISOTRETINOIN Phase III study will be approximately $1.0 to $1.5 million to complete the trial.

Operating, General and Administrative ("OG&A") expenses for Q1 2011 were $1.2 million, compared to $0.9 million in Q1 2010.  The year-over-year change primarily reflects increased business development activity in Q1 2011 related to exploring new product opportunities. Net loss in Q1 2011 was $1.1 million ($0.05 per share), compared with a loss of $0.5 million ($0.02 per share) in Q1 2010.

The Company's financial position remained solid at quarter end. As at March 31, 2011, Cipher had cash of $9.1 million, compared with $10.3 million as at December 31, 2010.

Product Update

Lipofen® monthly prescriptions remained steady in Q1 2011 relative to the prior quarter. The product continues to be actively promoted by Cipher's U.S. distribution partner, Kowa.

During Q1 2011, Cipher entered into the final stages of its Phase III safety trial for CIP-ISOTRETINOIN. Subsequent to quarter end, the trial was completed, with more than 900 patients enrolled. Cipher expects to report top-line results in late Q2 2011 and complete its FDA and Health Canada submissions by Q4 2011. The FDA review of this submission under PDUFA is expected to be six months, and the Company is targeting the second half of 2012 for the U.S. commercial launch of the product.

During Q1 2011, the Company continued with pre-commercial activities for CIP-TRAMADOL ER, including the completion of the manufacturing validation batches and out-licensing discussions with potential U.S. distributors. The Company is hopeful of completing out-licensing negotiations in Q2 2011 and is targeting late Q3 2011 for the commercial launch. In addition, Cipher expects a response from Health Canada concerning regulatory approval in Q3 2011.

Notice of Conference Call

Cipher will hold a conference call today, May 12, 2011, at 8:30 a.m. (ET) to discuss its financial results and other corporate developments. To access the conference call by telephone, dial 647-427-7450 or 1-888-231-8191.  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 commercial-stage 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 is being marketed in the United States by Kowa Pharmaceuticals America under the label Lipofen®. Cipher's second product, an extended-release version of the pain reliever tramadol, received FDA approval in May 2010 and the Company's third product, a novel formulation of the acne treatment isotretinoin, is in its final Phase III safety study.

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. The words "may", "will", "could", "should", "would", "suspect", "outlook", "believe", "plan", "anticipate", "estimate", "expect", "intend", "forecast", "objective", "hope" and "continue" (or the negative thereof), and words and expressions of similar import, are intended to identify forward-looking statements. 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.

Notes to the Interim Financial Statements

March 31, 2011

(in thousands of Canadian dollars, except per share amounts - unaudited)

1 NATURE OF OPERATIONS

Cipher Pharmaceuticals Inc. ("Cipher" or "the Company") is a commercial stage drug development company focused on commercializing novel formulations of successful, currently marketed molecules using advanced drug delivery technologies.  The Company'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. Cipher is incorporated under the Business Corporations Act of Ontario and is located at 5650 Tomken Boulevard, Mississauga, Ontario.

2 BASIS OF PREPARATION AND ADOPTION OF IFRS

The Company prepares its financial statements in accordance with Canadian generally accepted accounting principles as set out in the Handbook of the Canadian Institute of Chartered Accountants ("CICA Handbook").  In 2010, the CICA Handbook was revised to incorporate International Financial Reporting Standards, and requires publicly accountable enterprises to apply such standards effective for years  beginning on or after January 1, 2011.  Accordingly, the Company has commenced reporting on this basis in these interim financial  statements.  In these financial statements, the term "Canadian GAAP" refers to Canadian GAAP before the adoption of IFRS.

These interim financial statements have been prepared in accordance with IFRS applicable to the preparation of interim financial statements, including IAS 34 and IFRS 1.  Subject to certain transition elections disclosed in note 4, the Company has consistently applied the same accounting policies in its opening IFRS balance sheet at January 1, 2010 and throughout all periods presented, as if these policies had been in effect.  Note 4 discloses the impact of the transition to IFRS on the Company's balance sheet, statement of operations and comprehensive loss and statement of cash flows, including the nature and effect of significant changes in accounting policies from those used in the Company's financial statements for the year ended December 31, 2010.

The policies applied in these interim financial statements are based on IFRS issued and outstanding as of May 11, 2011, the date the Board of Directors approved the statements.  Any subsequent changes to IFRS that are given effect in the Company's annual financial statements for the year ending December 31, 2011 could result in restatement of these interim financial statements, including the transition adjustments recognized on the change-over to IFRS.

These interim financial statements should be read in conjunction with the Company's Canadian GAAP annual financial statements for the year ended December 31, 2010.  Note 4 discloses IFRS information for the year ended December 31, 2010 that is material to an understanding of these interim financial statements.

3 SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies used in the preparation of these interim financial statements are described below.

Basis of measurement
The financial statements have been prepared under the historical cost convention.

Translation of foreign currencies
The financial statements are presented in Canadian dollars, which is the Company's functional currency.  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 income (loss) for the period.

Critical accounting estimates and judgments
The Company makes estimates and assumptions concerning the future that will, by definition, seldom equal actual results. The following  are the estimates and judgments applied by management that most significantly affect the Company's financial statements. These estimates  and judgments have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next  financial year.

(i) Estimated useful lives and valuation of intangible assets - management estimates the useful lives of intangible assets based on the period during which the assets are expected to be available for use and also estimates the recoverability to assess if there has been an  impairment.  The amounts and timing of recorded expenses for amortization and impairments of intangible assets for any period are affected by these estimates. The estimates are reviewed at least annually and are updated if expectations change as a result of technical or commercial obsolescence, generic threats and legal or other limits to use.  It is possible that changes in these factors may cause significant changes in the estimated useful lives of the Company's intangible assets in the future.

(ii) Revenue recognition - management evaluates the multiple elements and units of accounting which are included within certain licensing  and distribution agreements.  The recognition of revenue on up-front licensing payments and pre-commercialization amounts are over the  estimated period that the Company maintains substantive contractual obligations.  The estimate periods are reviewed at least annually and  are updated if expectations change as a result of licensing partner interactions, product commercial obsolescence or other limiting factors. It is possible that these factors may cause significant changes in the Company's recognition of revenue in the future.

(iii) Income taxes - management uses estimates when determining current and future income taxes.  These estimates are used to determine the recovery of tax loss carry forwards, research and development expenditures and investment tax credits.

Financial instruments
Financial assets and liabilities are recognized when the Company becomes a party to the contractual provisions of the instrument.  Financial assets are derecognized when the rights to receive cash flows from the assets have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership. Financial assets and liabilities are offset and the net amount is reported in the balance sheet when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously.

At initial recognition, the Company classifies its financial instruments in the following categories depending on the purpose for which the instruments were acquired:

(i) Financial assets and liabilities at fair value through profit or loss:  A financial asset or liability is classified in this category if acquired principally for the purpose of selling or repurchasing in the short term.  The Company does not have any instruments classified in this category.  Financial instruments in this category are recognized initially and subsequently at fair value.  Transaction costs are expensed in the statement of operations. Gains and losses arising from changes in fair value are presented in the statement of operations in the period in which they arise. 

(ii) Available-for-sale investments: Available-for-sale investments are non-derivatives that are either designated in this category or not classified in any of the other categories.  The Company does not have any instruments classified in this category.  Available-for-sale investments are recognized initially at fair value plus transaction costs and are subsequently carried at fair value.  Gains or losses arising from changes in fair value are recognized in other comprehensive income.  When an available-for-sale investment is sold or impaired, the accumulated gains or losses are moved from accumulated other comprehensive income to the statement of operations and are included in other gains and losses.

(iii) Loans and receivables:  Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not  quoted in an active market.  The Company's loans and receivables comprise cash, accounts receivable and loan receivable, and are included in current assets due to their short-term nature.  Loans and receivables are initially recognized at the amount expected to be received, less, when material, a discount to reduce the loans and receivables to fair value.  Subsequently, loans and receivables are measured at amortized cost using the effective interest method less a provision for impairment.

(iv) Financial liabilities at amortized cost: Financial liabilities at amortized cost include accounts payable and accrued liabilities.  Accounts payable and accrued liabilities are initially recognized at the amount required to be paid, less, when material, a discount to reduce the payables to fair value.  Subsequently, accounts payable are measured at amortized cost using the effective interest method.  Financial liabilities are classified as current liabilities if payment is due within twelve months. Otherwise, they are presented as non-current liabilities.


Impairment of financial assets
At each reporting date, the Company assesses whether there is objective evidence that a financial asset is impaired.  If such evidence exists, the Company recognizes an impairment loss.  Impairment losses on financial assets carried at amortized cost are reversed in subsequent periods if the amount of the loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized.

Cash
Cash includes deposits held with banks.

Accounts receivable
Accounts receivable consist of amounts due from licensing partners for royalties and product sales in the normal course of business and other amounts such as interest receivable and tax credits receivable.

Prepaid expenses and other assets
Prepaid expenses consist of amounts paid in advance for items that have future value to the Company, such as insurance policy payments, FDA fees, data base subscription fees and other items paid in advance. Other assets includes the lease and utility deposits.

Property and equipment
Property and equipment are recorded at historical cost less accumulated depreciation and accumulated impairment losses.  The useful lives of property and equipment are reviewed at least once per year.  Depreciation is computed using the straight-line method, using the following estimated useful lives of the assets or lease terms:

Intangible assets
Intangible assets consist of marketing and other rights relating to products and are recorded at cost less accumulated amortization and accumulated impairment losses.  Intangible assets have a finite life and are amortized using the straight-line method over their estimated period of useful life.  The useful lives of the intangible assets are reviewed at least once per year.  Amortization commences on the earlier of the date of regulatory (generally, U.S. Food and Drug Administration) approval for marketing the related product or upon substantive revenue being generated from the product under a commercial licensing agreement.  The estimated period of useful life has been determined to be 3.5 years from the date of regulatory approval for marketing the related product. Should amortization commence as a result of generating revenue, the amortization period would include the time prior to regulatory approval. 

Impairment of non-financial assets
Non-financial assets, which include property and equipment and intangible assets, are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.  An impairment loss is recognized when the carrying amount of a non-financial asset exceeds the sum of the estimated present value of the expected future cash flows from the non-financial asset.  The Company evaluates impairment losses for potential reversals when events or circumstances warrant such consideration. 

Accounts payable and accrued liabilities
Accounts payable are obligations to pay for goods and services that have been acquired in the ordinary course of business from suppliers and are classified as current liabilities if payment is due within one year or less.  If not, they are presented as non-current liabilities.

Deferred revenue
Deferred revenue consists of amounts received from licence partners in advance of revenue recognition.  Amounts expected to be recognized within one year or less are classified as current liabilities with the balance being classified as non-current liabilities.

Share capital
Common shares are classified as equity.  Incremental costs directly attributable to the issuance of shares are recognized as a deduction from equity.

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 collectability 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.

Research and development
The Company conducts 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 and contractual reimbursements from development partners, are expensed in the periods in which they are incurred.

Income taxes
Income tax comprises current and deferred tax. Current tax is the expected tax payable on the taxable income for the year using tax rates enacted or substantively enacted at the end of the reporting period and any adjustment to tax payable in respect of previous years. Deferred tax is recognized in respect of temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred income tax is determined on a non-discounted basis using tax rates and laws that have been enacted or substantively enacted at the balance sheet date and are expected to apply when the deferred tax asset or liability is settled. Deferred tax assets are recognized to the extent that it is probable that the assets can be recovered.  Tax on income for interim periods is accrued using the tax rate that would be applicable to expected total annual earnings.

Share-based compensation
The fair value of options granted to employees and directors is estimated on the date of the grants using the Black-Scholes option pricing model.  Stock options vest over four years (25% per year), expire after ten years and can only be settled for shares.  Each tranche in an award is considered as a separate award with its own vesting period and grant date fair value.  Share-based compensation expense is recognized over the tranche's vesting period based on the number of awards expected to vest, by increasing contributed surplus.  The number of awards expected to vest is reviewed annually, with any impact being recognized immediately.  Share-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.

Earnings per share
Basic earnings per share ("EPS") is calculated using the treasury stock method,  by dividing the net income (loss) for the period by the weighted number of common shares outstanding during the period.  Diluted EPS is calculated by adjusting the weighted average number of common shares outstanding for dilutive instruments.  

Accounting standards issued but not yet applied
International Financial Reporting Standard 9, Financial Instruments ("IFRS 9")
IFRS 9 was issued in November 2009 and contained requirements for financial assets. This standard addresses classification and measurement of financial assets and replaces the multiple category and measurement models in IAS 39 for debt instruments with a new mixed measurement model having only two categories: amortized cost and fair value through profit or loss. IFRS 9 also replaces the models for measuring equity instruments, and such instruments are either recognized at fair value through profit or loss or at fair value through other comprehensive income. Where such equity instruments are measured at fair value through other comprehensive income, dividends are recognized in profit or loss to the extent not clearly representing a return of investment, are recognized in profit or loss; however, other gains and losses (including impairments) associated with such instruments remain in comprehensive income indefinitely.

Requirements for financial liabilities were added in October 2010 and they largely carried forward existing requirements in IAS 39,  Financial Instruments - Recognition and Measurement, except that fair value changes due to credit risk for liabilities designated at fair value through profit and loss would generally be recorded in other comprehensive income.

This standard is required to be applied for accounting periods beginning on or after January 1, 2013, with earlier adoption permitted.  The Company has not yet assessed the impact of the standard or determined whether it will adopt the standard early.

4 TRANSITION TO IFRS

The effect of the Company's transition to IFRS, described in note 2, is summarized in this note as follows:    
(i)    Transition elections    
(ii)   Reconciliation of deficit, contributed surplus, comprehensive loss and cash flow as previously reported under Canadian GAAP to IFRS    
(iii)  Disclosure of additional IFRS information for the year ended December 31, 2010

(i) Transition elections:
IFRS 1 - First-time Adoption of International Financial Reporting Standards - sets forth guidance for the initial adoption of IFRS.  Under IFRS 1, the standards are applied retrospectively at the transitional balance sheet date with all adjustments to assets and liabilities taken to retained earnings unless certain exemptions are applied.  The Company has applied the following exemption to its opening balance sheet dated January 1, 2010:

Share-based payment transactions - the Company has elected not to apply IFRS 2 to awards that vested prior to January 1, 2010.

With regard to the designation of financial assets and liabilities, the Company has elected to re-designate cash from the held-for-trading category to the loans and receivables category and as required by IFRS 1.  In addition, estimates made under IFRS at the date of transition must be consistent with estimates made for the same date under previous GAAP, unless there is evidence that those estimates were in error.

(ii) Reconciliation of deficit, contributed surplus, comprehensive loss and cash flow as previously reported under Canadian GAAP to IFRS:
In preparing its financial statements in accordance with IFRS, the Company has adjusted amounts reported previously in financial statements prepared in accordance with Canadian GAAP.  An explanation of how the transition from previous Canadian GAAP to IFRS has affected the Company's financial position, financial performance and cash flow is set out below.

Statements of cash flows - the transition to IFRS had no significant impact on cash flows generated by the Company.

Under IFRS, the Company accrues the cost of employee stock options over the vesting period using the graded method of amortization rather than the straight-line method, which was the Company's policy under Canadian GAAP.  As a result of this change, contributed surplus increased by $317 and deficit increased by $317 at the date of transition to IFRS.  General and administrative expenses decreased by $33 for the three months ended March 31, 2010 and by $116 for the year ended December 31, 2010.

(iii)  Disclosure of additional IFRS information for the year ended December 31, 2010:
Certain disclosures required in annual IFRS financial statements were not previously disclosed in the Company's Canadian GAAP annual financial statements for the year ended December 31, 2010.  Certain note disclosures in these interim financial statements include December 31, 2010 information as if it had been reported under IFRS.

Compensation of key management - key management includes directors and executives of the Company.  The compensation paid or payable to key management for services is shown below:
 

5 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
Cash - the Company's cash balance is on deposit with a Canadian chartered bank that has a DBRS rating of "AA" for deposits and senior debt. 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.  The accounts receivable balance is concentrated between two licensing partners.  Both have been partners with the Company for over two years, with no defaults in the past.  As of March 31, 2011, no accounts receivable balances were impaired or past due.

(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 $2,076 as at March 31, 2011 are expected to 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.  The accounts receivable balance at March 31, 2011 includes a total of US$1,120 and accounts payable and accrued liabilities includes a total of US$1,033. A 10% change in the US/CDN exchange rate on the net March 31, 2011 balance would have had a $9 impact on net income.

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.

6 INTANGIBLE ASSETS

The Company has 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 preferred shares are redeemable by the Company from amounts received under the licensing agreements for the products.  The Company may be required to pay additional amounts to Galephar in respect of the CIP-ISOTRETINOIN intangible rights of up to $632 (US$650) if certain future milestones are achieved as defined in the agreement.  These additional payments will be made in the form of 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.  The Company is currently amortizing the intangible rights related to CIP-ISOTRETINOIN. After product-related expenses are deducted and after the recovery of Cipher's investment in the Galephar shares, approximately 50% of all milestone and royalty payments received by the Company under the licensing agreements will be paid to Galephar.

The following is a summary of intangible assets as at March 31, 2011:

 

At March 31, 2011, 1,345,062 options were fully vested and exercisable (1,034,560 at March 31, 2010).

During the three months ended March 31, 2011, the Company issued 196,000 stock options under the employee and director stock option plan, with an exercise price of $1.16, 25% of which vest on March 11 of each year, commencing in 2012, and expire in 2021.  Total  compensation cost for these stock options is estimated to be $198, which will be recognized on a graded basis over the vesting period of the stock options.
     

The stock options issued during the three months ended March 31, 2011 were valued using the Black-Scholes option pricing model, with the following assumptions.  Expected volatility is based on the Company's historical volatility, while estimated forfeitures are not considered significant.

10 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 three months ended March 31, 2011 was 24,079,878 (for the three months ended March 31, 2010 - 24,054,878).

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.

11 SEGMENTED INFORMATION

The Company's operations are categorized into one industry segment, being specialty pharmaceuticals.  All of the Company's assets, including capital and intangible assets, are in Canada, while all licensing revenue is derived from the United States.