Toronto Stock Exchange Symbol: DND

MISSISSAUGA, ON, Oct. 26, 2011 /CNW/ - Cipher Pharmaceuticals Inc. (TSX: DND) today announced its financial and operational results for the three months ended September 30, 2011 ("Q3 2011").

Q3 2011 Summary

• Cipher's U.S. marketing partner, Vertical Pharmaceuticals, launched extended-release tramadol (CIP-TRAMADOL ER) under the name ConZip™.
• Received Health Canada approval for CIP-TRAMADOL ER.
• Completed Canadian distribution and supply agreement for CIP-TRAMADOL ER with Medical Futures Inc.; product to be launched in Q1 2012 under the name Durela™.
• Strengthened balance sheet at quarter end with cash of $9.2 million and no debt.

"With Lipofen® generating steady revenue and our tramadol product now being marketed in the U.S. and set for a Canadian launch in early 2012, we have multiple product revenue streams contributing to our performance for the first time," said Larry Andrews, President and CEO of Cipher. "We are also on track to file Health Canada and FDA submissions this quarter for our high-potential acne product, CIP-ISOTRETINOIN, which is expected to trigger a $1 million milestone payment from our U.S. partner. Our balance sheet remains strong, and we believe the combination of increasing product revenues and future milestone payments from our marketing partners positions us well for future growth."

Financial Review

Revenue in Q3 2011 was $1.1 million, similar to Q3 2010. Prior year Q3 results included $0.5 million non-cash revenue from the original up-front licensing payment on Lipofen®, as well as a milestone payment received in 2009, both of which were being recognized over several quarters, ending in 2010. Results for Q3 2011 include $0.5 million of revenue from extended-release tramadol, representing the Company's first revenue from this product. Royalty revenue from Lipofen® increased by approximately $0.1 million in Q3 2011 compared to Q3 2010.

Research and Development ("R&D") expense for Q3 2011 was $0.5 million, an increase of $0.3 million compared to Q3 2010. The year-over-year increase reflects spending on the CIP-ISOTRETINOIN clinical study, which is now completed.  The reported R&D for Q3 2011 is net of $0.2 million of reimbursed R&D costs related to the CIP-ISOTRETINOIN Phase III clinical study.  The Company does not expect to incur any additional material clinical development costs for CIP-ISOTRETINOIN in the current year.

Operating, General and Administrative ("OG&A") expenses for Q3 2011 were $0.7 million, compared with $0.9 million in Q3 2010.  Net loss in Q3 2011 was $0.2 million ($0.01 per share), the same as in Q3 2010.

The Company's financial position strengthened during the quarter. At September 30, 2011, Cipher had cash of $9.2 million, compared with $8.6 million at June 30, 2011 and continued to have no debt. The Company expects to receive additional milestone payments in the coming quarters from the distribution and supply agreements in place on its current products.

Product Update

Lipofen®
Lipofen® monthly prescriptions remained steady in Q3 2011 relative to the prior quarter. The product continues to be actively promoted by Cipher's U.S. distribution partner, Kowa.

CIP-ISOTRETINOIN
During Q3 2011, Cipher continued to prepare its revised New Drug Application (NDA) for submission to the FDA in Q4 2011. The FDA review under PDUFA is expected to be six months. A regulatory submission to Health Canada is also planned for Q4 2011.

CIP-TRAMADOL ER (ConZip™/Durela™)
In September 2011, Cipher's U.S. marketing partner, Vertical Pharmaceuticals, launched ConZip™ with a sales force of approximately 60 representatives initially. In September 2011, Cipher also received Health Canada approval and, subsequently, completed a distribution and supply agreement under which Cipher has granted Medical Futures the exclusive right to market, sell and distribute CIP-TRAMADOL ER in Canada. Medical Futures plans to launch the product in Q1 2012 under the trade name Durela™. Under the terms of the agreement with Medical Futures, Cipher receives upfront payments totaling CAD$0.3 million with additional payments contingent upon the achievement of certain net sales milestones. In addition, Cipher will receive a double-digit royalty on net sales.

New Products and Out-Licensing Activities
Cipher continues to actively pursue additional product candidates and advance out-licensing discussions for its current products in other territories.

Notice of Conference Call

Cipher will hold a conference call today, October 26, 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

Cipher Pharmaceuticals is a growing specialty pharmaceutical company that commercializes novel formulations of successful, currently marketed molecules. Cipher's strategy is to in-license clearly differentiated products, advance them through the clinical development and regulatory approval stages, and out-license to international marketing partners. The Company's first product is a fenofibrate formulation marketed in the United States as Lipofen®. Cipher's second product, an extended-release tramadol, is marketed in the United States as ConZip™ and will be marketed in Canada as Durela™. The Company's third product, a novel formulation of the acne treatment isotretinoin, recently completed its final Phase III safety study, with regulatory submissions planned in the United States and Canada in Q4, 2011.

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.

Financial Statements

For the Nine Months Ended September 30, 2011
(Unaudited)

Cipher Pharmaceuticals Inc.
Notes to the Interim Financial Statements
September 30, 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 is now reporting on this basis in its 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 preparaion of interim financial statements, including IAS 34 and IFRS 1.  Subject to certain transition elections disclosed in note 3, 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 3 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 October 25, 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 and the Company's interim financial statements for the three month period ended March 31, 2011 prepared in accordance with IFRS applicable to the preparation of interim financial statements.  Note 3 discloses IFRS information for the year ended December 31, 2010 that is material to an understanding of these interim financial statements.


3 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.  In addition, as required by IFRS 1, 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 as at January 1, 2010.  General and administrative expenses decreased by $96 for the nine months ended September 30, 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:

 4 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 $675 (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 and CIP-TRAMADOL. After product-related expenses are deducted and after the recovery of Cipher's investment in the preferred shares of Galephar, 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 September 30, 2011:

The Company has considered indicators of impairment as of January 1, 2010, December 31, 2010 and September 30, 2011.  No indicators were identified and therefore no impairment test was required.

Share purchase plan - Effective May 13, 2011, the Company implemented an Employee and Director Share Purchase Plan ("ESPP") to allow employees and directors to share in the growth of the Company through share ownership.  Through the ESPP, employees and directors may contribute amounts from payroll to be used to purchase shares of the Company at a 15% discount from the prevailing trading price.  The shares issued under the ESPP are new shares issued from treasury.  During the three month period ended September 30, 2011, 78,994 shares were issued under the ESPP.  Included in share based compensation expense is $10 associated with the ESPP for the three month period ended September 30, 2011.

Stock option plan
The following is a summary of the changes in the stock options outstanding from January 1, 2010 to September 30, 2011:

At September 30, 2011, 1,231,153 options were fully vested and exercisable (1,054,560 at September 30, 2010).

(a) 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.

 (b) During the three months ended June 30, 2011, 104,445 stock options were exercised for a total cash consideration of $47. 
Capital stock increased by $90 representing the cash consideration of $47 and a $43 transfer from contributed surplus.

8 FOREIGN EXCHANGE FORWARD TRANSACTION
The Company utilizes derivative financial instruments in the normal course of its operations as a means to manage risks from fluctuations in foreign exchange.  From time to time, the Company enters into U.S. currency foreign exchange forward contracts in order to hedge future U.S. cash flow surpluses, where the amount and timing of receipt of such funds is reasonably predictable.  In Q3 2011, the Company entered into a foreign exchange forward contract to deliver US$1.5 million at a fixed rate of exchange of $1 US = $1.0285 CDN on November 4, 2011 related to two known U.S. amounts receivable that are expected to be collected in late October 2011 related to product distribution agreements.  The foreign exchange forward contract is considered an effective cash flow hedge and qualifies for hedge accounting.

9 EARNINGS (LOSS) PER SHARE
Earnings (loss) per share is calculated using the weighted average number of shares outstanding.  The weighted average number of shares outstanding for the three and nine month periods ended September 30, 2011 was 24,225,801 and 24,138,236 respectively (for the three and nine month periods ended September 30, 2010 respectively 24,079,878 and 24,068,706).

As the Company had a loss for the three and nine month periods ended September 30, 2011 and for the three month period ended September 30, 2010, basic and diluted loss per share are the same because the exercise of all stock options would have an anti-dilutive effect.  For the prior year, the dilutive impact on earnings per share for the nine month period ended September 30, 2010 is not significant.