Jason Grenfell-Gardner - President and CEO
Jenniffer Collins - Chief Financial Officer
Scott Henry - ROTH Capital
IGI Laboratories, Inc. (IG) Q3 2013 Results Earnings Call October 29, 2013 4:30 PM ET
Good day, ladies and gentleman. And welcome to the Q3 2013 IGI Laboratories, Inc. Earnings Conference Call hosted by Jason Grenfell-Gardner. Before we begin, I would like to read the following statement.
Except for historical facts, the statements on this call made or to be made by IGI Laboratories, Inc. are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties.
For example, statements about the company’s anticipated growth and future operations, the current or expected market size for its products, the success of current or future product offerings, the research and development efforts, and the company’s ability to file for and obtain U.S. Food and Drug Administration, FDA approvals for future products are forward-looking statements.
Forward-looking statements are merely the company’s current prediction of future events. The statements are inherently uncertain and actual results could differ materially from the statements made herein.
There is no assurance that the company will achieve the sales levels that will make its operations profitable or that FDA filings and approvals will be completed and obtained as anticipated.
For a description of additional risks and uncertainties, please refer to the company’s filings with the Securities and Exchange Commission, including its latest annual report on Form 10-K and its latest quarterly report on Form 10-K. The company assumes no obligation to update its forward-looking statements to reflect new information and developments.
And now, I would like to hand the call over to Jason Grenfell-Gardner. Over to you, sir.
Thank you, [Mark]. Good afternoon, ladies and gentlemen. And welcome to this IGI Laboratories’ business update covering the third quarter of 2013. I am Jason Grenfell-Gardner, the President and CEO of IGI and I am joined today by Jenniffer Collins, our Chief Financial Officer. Thank you for joining us today.
This quarter has been another great quarter at IGI and on today’s call, I will share with you some of the highlights of our business performance and where we are in our strategic objectives. Jenniffer will then review our financial results for the third quarter and then we’ll open up this call for questions. So let’s get started.
This quarter represents the fifth straight quarter of growth in the net revenues of our company and for the first time in 22 quarters, IGI is approaching breakeven. I think that’s pretty phenomenal turnaround and we’ve done that while laying the foundation for our future growth by the complete dedication of the IGI team to our strategic objectives.
Let me just remind you what we promise to do for 2013. First, we set out the commercial lines and launch our own IGI label products for the first time. Second, we undertook to double our revenues and achieved profitability. Third, we said we would file six ANDA’s this year and continue to extend our R&D pipeline both through our owned development and through product acquisitions.
That’s obviously a pretty husky list of goals and let me remind you that we undertook to do this without having to raise further equity in this business, setting ourselves to discipline to move this company to profitability. And we said, we would do these things while improving gross margin in our business.
So, where we are with these goals? In terms of the IGI label generic products, our team has now launched four products into the market, including the three authorized generic products, that’s through our partnership with Medimetriks and our Econazole Nitrate product that we acquired earlier this year.
I want to talk about that product in more detail in a moment, but with respect to the IGI product line, these products are doing great. Through the third quarter of this year we have sold over 86 units of IGI label product and you can find them in any major pharmacy in America.
These products have generated $4.2 million of net revenue in 2013 and this only includes one-month of sales of the Econazole Nitrate product for the third quarter due to the timing of its launch. Let me talk a little bit about this Econazole product.
I’ve seen quite a few product acquisitions and site transfers in my experience. Usually this can be pretty messy affairs as they involve a number of different departments in order to make them work. Frankly, I have not seen a site transfer be performed with the single-minded focus that I saw from the IGI team.
To acquire a product, bringing in-house, manufacture it, package it, perform the required testing, submit it to the FDA for approval and then launch the product in seven and half months is amazing and the product is beautiful. You should be as proud of this team as I am and what they were able to do, and the skill and the quality that they employ in doing it.
Now as a result of these launches, we are well in our way to achieving our second goal of doubling our revenue and achieving profitability. Jenniffer will discuss these results in greater detail, but in short, we’ve achieved revenue of $11.5 million year-to-date in 2013, compared to $6.3 million in 2012 and in this quarter alone, we recorded net revenues of $4 million, compared to $2 million in 2012.
This growth was not limited to just the IGI label products, however, as we also grew our contract manufacturing and formulation services business over 17% year-to-date compared to 2012, and we are very close now to breakeven, with the net loss for the third quarter of just $95,000, compared to $1.4 million in the same quarter in 2012. For the year 2013, our net loss stands at $0.8 million, compared to $2.7 million for the same period in 2012.
With the company now performing well across our business lines, we are well positioned to meet our 2013 financial objectives. You know these commitments to you, our shareholders are extremely important to us.
And our focus on these objectives really helps our entire team to be unified in our efforts to grow our business with appropriate control and discipline. Of course, when we talk about these commitments, one of our key commitments is to continue to drive shareholder value, which we believe happens to the execution of our R&D pipeline.
We currently have 12 ANDAs on file with the FDA with a further two to be filed this year. Based on most recent IMS data from August, the addressable market for these 12 ANDAs now exceeds $300 million, which is an upward revision from our previous estimates.
The generic topical pharmaceutical market continues to grow significantly and the latest IMS health data indicate that this trend is continuing. Right now, we’re actively working to recruit further talent to our R&D team to give us even greater development bandwidth for 2014 and to increase our number of submissions.
Of course, we know that submissions are great but approvals are better. On that front, we continue to move forward our pipeline with the FDA and we are optimistic that we’re making progress towards approvals everyday.
Finally, let me talk about the impact of the delivery of these goals on our margins. Our gross margin continue to increase over the previous quarter and is now at 31% year-to-date in 2013 compared to 31.7% for the same period in 2012. You may recall that our gross margins in the third quarter last year was driven by a higher level of contract formulation services, compared to this period where our business is being driven more by our contract manufacturing and IGI label products.
Since I talked about the IGI products, let me tell you a bit more about where our contract manufacturing business is. Year-to-date 2013, our contract business has grown 17% over the same period in 2012 but drilling down a bit into that number, our contract business consists as you know of both contract formulation services as well as contract manufacturing services, with our formulation business being the beginning of project that often become contract manufacturing business down the line.
In 2013, we've been focused on the delivery of the manufacturing part of our business. So while our formulation services revenue is down $1.1 million for the year, our contract manufacturing business is up 43% and that’s what’s driving the overall growth in our contract services business.
We've also added two new customers in 2013, one of which was in the third quarter. We continue to expect based on our projections that our gross margins will continue to expand compared to 2012. And this will be delivered by our growth in revenue, our shift in product mix including our higher-margin products and the efficiency is being driven in manufacturing by our team, led by our new director of operations, Mr. Sanjay Samudre.
Sanjay joined us over the summer and brings with him nearly 20 years of experience in the pharmaceutical industry, including operations experience in generic sector. And one of his key goals is to ensure that we run an efficient operation in our manufacturing.
So IGI has made a lot of progress and that progress is reflected in our financial performance, our position in the pharmaceutical market and our relationships with our customers. We’ve really picked up speed over the past few months and I'm confident that we have the right tools to continue to perform.
Now let me turn it over to Jenniffer Collins, our CFO to continue our review of this quarter.
Thanks, Jason. Good afternoon everyone and again thanks for joining us today. Our total revenue for the third quarter of 2013 was $4 million, an increase of 101% over the same quarter last year. We increased revenue of $2 million this quarter. The increase was really attributed to $1.4 million of revenue generated from our first three IGI label for our first generic products, in addition to our econazole nitrate cream 1% that we launched this quarter.
In addition to that, we increased our contract services business $1.1 million. These increases were offset by a decline in revenues from our formulation services business of about $500,000. Our IGI product portfolio consists of three, our first generic topical prescription products as well as our recently acquired proprietary product, econazole nitrate cream 1%.
As customary in the pharmaceutical industry, our gross product sales are subject to a variety of deductions, which lead to the $1.4 million of our reported net IGI product sales. When we recorded gross revenue from these sales, we make estimates of various allowances which reduced product sales. These include estimates for chargebacks, rebates, cash discounts and returns, and other allowances.
We made some adjustments to these estimates for these deductions to-date, none of which were individually significant and will continue to monitor our estimates closely as the actual charges are presented. As Jason said earlier, we are very pleased with the progress we’ve made penetrating these markets for each of these products.
As I mentioned, we grew our contract services business by $$1.1 million as compared to the third quarter of 2012. As we’ve discussed in 2012, we completed all of the work to have products from one of our pharmaceutical partners site transfer to our facility in Buena.
We began shipping that product to this customer in the fourth quarter of 2012. Our increased contract manufacturing revenue in the third quarter of 2013 was primarily attributable to this customer. Contract manufacturing services revenue from our pharmaceutical customers represented 62% of Q3 revenue as compared to 53% in the same quarter last year.
Sales of our over-the-counter products were 5% in this quarter compared to 2% last year and our cosmetic product sales represented 33% of revenue in this quarter, as compared to 45% in the same period last year.
Year-to-date, 57% of our contract manufacturing service revenue resulted from the sale of pharmaceutical products, as compared to 48% in the first nine months since 2012. As you may recall, our contract manufacturing business is a make-to-order business and there is some variability in the percentage of our contract services revenue resulting from the sale of pharmaceutical products quarter-to-quarter.
However, year-over-year, we expect more of our contract business to result from sales through our pharmaceutical customers. The growth of our contract manufacturing services revenue and IGI label revenue was partially offset by the decrease of $500,000 in our contract formulation business. As Jason mentioned, we recorded significant revenue in 2012. And in addition to the formulation work we did for pharmaceutical partners, we provide additional information to them, sorry.
Typically, margins for our contract formulation services business are much higher than our product sales margins. And as a result of the nature of revenue, the $5,000 of formulation services revenue we recorded in the third quarter of 2012 was extremely high-margin business. These services allowed to effectively leverage our R&D team without incurring significant additional costs.
Our gross margins of 33% in the third quarter of 2013, was less than the gross margin of 38% recorded in the same quarter last year. We increased our gross margin to 33% in this quarter compared to 30% in the second quarter of 2013. And our year-to-date gross margins were approximately 31% in both years. This was really due to the increased revenue from our pharmaceutical partners as well as the launch of our own products, which has improved our 2013 gross profit and was only offset by the decline in revenues from our contract formulation services business.
We successfully continued to add higher-margin products to our products, so we expect gross margins to continue to improve. With our significant revenue, SG&A as a percentage of sales for the three months ended September 30th was only 17%, compared to 49% in the same period last year.
We do plan to continue to manage our administrative costs or expanding our customer base. But as we expand our capital prescription drug portfolio and more importantly approach profitability, we expect to make additional investments in SG&A in order to successfully place those products with national, regional and local retail customers and properly support our growth.
Our successful management of SG&A will help us to continue to invest in R&D. We spent almost $700,000 in the third quarter of 2013, compared to just $600,000 in the same period last year. Our investment in R&D includes fees related to two NDA filings in the third quarter of 2013.
In accordance -- in order to continue to expand the pipeline and drive shareholder value, we expect we will continue to increase our R&D cost over time. As we focus on expanding the development of our portfolio of generic topical products, adding to the 12 submissions that we already have filed with the FDA.
We plan to expand our R&D team and increase the number of fillings on an annual basis when possible. In addition, some of our future fillings may include additional costs for required outside testing, all of which will continue to increase R&D costs. We do plan to manage that growth to be consistent with our strategic plan.
Net loss for the third quarter rounded to $0.00 per share, as compared to $0.04 per share in the same quarter last year. Our net loss of approximately $95,000 included $661,000 of R&D spending in this quarter and our net loss year to date was $0.02 per share, as compared to $0.07 per share in 2012.
Our net loss year-to-date of approximately $750,000 included $2.1 million of R&D spending. Year-to-date, we’ve used $1.4 million of cash on operations, which included $2.1 million that we spent on R&D.
As we said on previous calls, we’ve been making investments in our accounts receivable and inventory related to our IGI label business. And while we expect this to continue in the IGI label accounts over the next couple months, as our customer relationships continue to mature we expect that this investment will result in reaching profitability in 2013 as we projected.
We will continue to invest in R&D, manage our operating resources and increase our sales effort in order to ensure that we meet backhaul. We are intently focused on financial discipline required to execute our day-to-day management of cash. Jason and I are committed to achieving profitability by either driving our existing resources and manage our spending to ensure we meet our expectations.
Reaching profitability is a very important milestone for us at IGI, and it will enable us to continue to reinvest in our future and allow us the opportunity to explore additional opportunities to accelerate growth.
In the third quarter of this year, cash used in investing was $474,000, which included our $400,000 payment to Prasco for the Econazole Nitrate Cream 1% we purchased. The remaining $74,000 was spent on some minor capital expenditures.
Our cash and financing activities totaled $2.3 million for the year and included the $2 million of funds that we drew down from our credit line during the year. So you can see reaching profitability this quarter and demonstrating that this business is self funded, will be a huge milestone for us.
Things have been progressing well in our investor communication fund. We’ve made our first line of revisions to our website to hope we’ll make it easier for investors to find more information about us. We are speaking to institutions almost daily, some of which were hearing the IGI story for the first time. So it’s certainly exciting to be attracting new potential investors.
We are actively talking with investors, potential investors, we hope to add additional conference appearances to our list for the remainder of the year. And Jason and I are committed to continuously improving our communication with our investors. And we understand the importance of transparency with the investment community.
Jason and I are grateful for your participation today. And we look forward to updating you soon. I’ll turn the call back to Jason for his closing remarks.
Thanks Jen. Before we open this up to questions, I want to underline a couple of things. First as Jen said, we remain committed to the goal of at least doubling our revenue and achieving profitability in 2013. We also remain committed to financial discipline and financial responsibility and we will continue to demonstrate that as we make strategic decisions going forward.
As you know, we are focused on the execution of this business and we’re always working to accelerate the growth in business. We dedicated to our mission to become one of the top five leading companies in the generic topical pharmaceutical industry, industry that’s continuing to grow in which in the generic space is now over $3.9 billion, just up from $2.6 billion this time last year.
As the specialist in this industry, IGI is well positioned to continue to grow its pipeline and create meaningful shareholder value. As ever I’m grateful for your support and the opportunity to serve IGI. At this point, we’re happy to take your questions. Thank you.
(Operators Instruction) We have our first question from Scott Henry of ROTH Capital. Over to you please.
Scott Henry - ROTH Capital
Thank you and good afternoon. A couple questions, I guess for starters, just trying to get some granularity on the revenue line. I know it was $1.4 million in IGI products. My question is, what was the split between Econazole and the authorized generic sale?
Hey Scott, it’s Jason. How are you?
Scott Henry - ROTH Capital
I’m pretty good. Thanks.
Thanks for joining the call. At this time, we don’t really give specific breakdowns to individual products. We only really report our product sales by that some general class. So we’ve just given the details of our overall generic product sales.
Scott Henry - ROTH Capital
Okay. And then, I don’t know, what about research and development in income, do you brake that out. I know it’s not a very material number, but just from a modeling stand point?
So I mean that in terms of the third quarter, Scott, I mean, obviously the R&D income is broken down separately on the P&L. For this quarter, it was almost close to zero. We do expect that number will grow in the future but it really is -- there is certainly not a smooth run rate to that. It’s really based on the milestones with interesting contracts or as we continue to sign new contracts.
Scott Henry - ROTH Capital
So it’s a different -- it's something that…
Scott Henry - ROTH Capital
Okay, okay, that’s right. I see it in here now, my mistake. Just trying to come to realign those numbers. And a different question, I guess on the revenue line is to reach your doubling of revenues for the year. Are we going to perhaps see pretty significant jump in Q4, I think approximately $1.6 million sequentially if my math is correct?
Where -- what do you expect to be the primary drivers for that, will be the authorized generic, will be a Econazole Nitrate, I assume it would be. But any color you could provide on that.
Well, I think its combination of things right. So first, I do believe that there is some maturing of the customer accounts that are buying products across the IGI generic line. So new customers that have come on board, let say throughout the second and third quarters, they were starting to reach their standard run rate is definitely going to help. And then of course just also taking in three, four quarters of Econazole as opposed to simply one month. So that’s going to help drive it as well, so that’s the first thing.
The second thing as I think we will see higher R&D income in the fourth quarter then we see in the current quarter, this quarter was quite there in terms of R&D income and that’s a bit of been outlier. And finally the pipeline for contract manufacturing is strong for the fourth quarter. So all of those three things together means that the business looks like it’s in the previous position to deliver what it needs to do.
Scott Henry - ROTH Capital
Okay. I noticed, you didn’t or perhaps I didn’t interprete it correctly. I didn’t hear you comment on Synalar in authorized generic sales, should I take that to mean that should be relatively sequentially flat or should I include that as one of the growth drivers?
I mean, I think again, this is done to individual client accounts, there may be some increase in those and it will depend on trends in the market. But overall I would expect there to be some growth in the generic part of our portfolio.
Scott Henry - ROTH Capital
Okay, great. I guess, I’m not really sure how to ask this question or it -- help the question but obviously a key event will be receiving that first proprietary generic approval. And can you give any color on how the interaction is going with FDA. Does it continue to move in the right direction and would you expect an approval in the next six months. Is that a reasonable target?
I mean I -- better than expect, I would say for me personally, I would hope that that’s the case. It’s very hard as you know to predict reactions of the FDA and how these things will progress. What I can say is that in terms of our responses and our dialog with them and our ongoing regulatory process, everything is progressing well.
And I would expect that to continue to be the case. So these things are maturing. As we’ve discussed in the past, the applications that we file in 2010 and 2011 are applications which are more under review. Those are applications which were filed on paper and therefore a little bit more laborious to get through that system. But that being said we -- we are having an ongoing dialog about them. So I would hope that we continue to see movement and as you say sometime within next six months see some of those approvals began to come.
Scott Henry - ROTH Capital
Okay. And I guess the final question, when you look at 12 ANDAs you have out there, can you talk about the pricing environment for those 12 ANDAs. I think at one point you had an addressable market of $200 million. Now, it’s $300 million, obviously you up the number of ANDAs at the agency but may be you can talk about how the pricing has been in the categories that you are going after?
Yes. I mean I think as we looked at the -- at the individual markets, there are certainly some markets there which had seen price appreciation. And that’s a trend that’s been happening throughout the topical market in various ways. So what I can say is that as you point out, I mean, we’ve definitely seen a revision in terms of our addressable market and that is definitely positive revision. We hope at this point that trend will continue.
Scott Henry - ROTH Capital
Okay. Great. Well that does it for me. Thank you for taking the questions and good luck
Thank you for your questions. The next question is from [Alan Troy], a Private Investor. Over to you please.
Hi, Jason and Jenniffer. Congratulations on a significant progress that the company has made. You guys are doing a great job as everybody else at the company. I was going to ask about the ANDAs but that was covered. So I’m just going to ask are you planning any meeting with the investment community in the near future. They’ve been very successful as far as the price of stock goes. Whenever we’ve had those meetings, you’ve got lot of people interested in fund managers et cetera. So what’s the story on that?
Yes. I think we’re certainly planning out some meanings in the November time frame probably looking at the going to, say on east, close to New York and Boston and meeting with some investors. We’re also trying to solidify a few presentations at a couple of conferences in the fourth quarter. And so hopefully one or two those will come to fruition before we get to the end of this year.
Great. Because it has very positive effect on the price of stock so over the conferences. I guess you guys really give a good presentation and make a lot of people interested.
Well, I hope that’s the case.
It’s great to hear from you all. Thank you.
Thank you for your question. We have no further questions. (Operator Instruction) We have another question from Frank Gerardi of Univest Management. Over to you please. Frank Gerardi, your line is open, can you please make sure your telephone is off mute. And the caller seems to be having issues. (Operator Instruction)
All right. Well, Mark, there are no further questions. Then I think we can conclude this call. Let me say again thank you for everyone for joining us on this call and for your support of IGI. And we look forward to speaking with you again in the very near future. Thank you so much.
Thank you. Ladies and gentlemen, your conference call now comes to an end. You may now disconnect. Thank you very much for joining.