IGI Laboratories' CEO Discusses Q3 2013 Results - Earnings Call Transcript

Feb.27.14 | About: Teligent, Inc. (TLGT)

IGI Laboratories, Inc. (IG) Q4 2013 Earnings Conference Call February 27, 2014 4:30 PM ET

Executives

Jason Grenfell-Gardner - President and CEO

Jenniffer Collins - Chief Financial Officer

Analysts

Scott Henry - ROTH Capital

Richard Siracusa - Merrill Lynch

Frank Gerardi - Univest

Operator

Good day, ladies and gentleman and welcome to the Q4 2013 IGI Laboratories Inc. Earnings Call. My name is Sarah, and I will be your operator for today. At this time all participants in listen-only mode, and later we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

Except for historical facts, the statements on this call made as well as oral statements or other written statements 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 approvals for future products are forward-looking statements. Forward-looking statements are merely the company's current predictions 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-Q. The company assumes no obligation to update its forward-looking statements to reflect new information and developments.

I would now like to turn the conference over to your host for today, Jason Grenfell-Gardner, President and CEO. Please proceed.

Jason Grenfell-Gardner

Thank you, Sarah. Good afternoon ladies and gentlemen. Welcome to this IGI Laboratories business update covering the fourth quarter and full year 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.

I want to discuss some highlights of our business performance with you, and also give you an update on the execution of our strategy. Then Jenniffer will review our financial results for the fourth quarter, and finally, I will set out for you our key goals for 2014.

Transition is a word you've heard me use in 2013, to describe our expectations of the year. As we know, our mission at IGI is to be a leading player in the generic topical prescription drug market. However, when I joined IGI, we didn't have any of our own IGI label products in the market. We talked about the fact that, we needed to build the foundation to make the transition from a contract manufacturing company in 2012, to a genuine generic pharmaceutical company in 2013.

Now, as we have reached the end of 2013, you've witnessed our transition to a generic pharmaceutical company, with two platforms for growth; generic pharmaceutical products and turnkey contract manufacturing and formulation services.

As we move forward into 2014, our business will continue to grow and develop and from transition, we can begin to talk about our business transformation. The execution required by our team here at IGI to make this happen has been exceptional. We set expectations high for our team in 2013, and as you can see by the results, we have delivered.

So today, I wanted to spend a few minutes taking you through the execution on our 2013 objectives, and then, I'd like to spend a bit of time talking to you about the next stage of our business transformation.

At the beginning of 2013, we set out four key objectives for this year, they were first, we expected to launch our first IGI labeled generic pharmaceutical products. Second, we said we would at least double 2012 revenue and achieve profitability by the end of 2013. Third, we undertook to expand our R&D pipeline, both through organic R&D as well as through product acquisitions, and to file six ANDAs throughout the year. And finally, we said that these actions would combine resulting increase in the gross margins in our business. So how did we do? Well, I'd say we hit four out of four of those targets.

In 2013 for the first time, IGI manufactured, marketed and sold its own topical pharmaceutical products. In our very first year, we sold over 325,000 units, which have generated a total of $7.4 million of net revenue in 2013. We have four IGI labeled products and eight presentations being actively marketed in the U.S. That's amazing, considering back in 2012, our commercialization strategy for these products were still on the drawing board.

We have been extremely disciplined in the marketplace, and as I look at our current market share and revenues in each of our products, I am proud of what we have achieved. Now that our commercial infrastructure is in place, we can continue to use these channels for further IGI products, as we expand our portfolio in 2014 and beyond. All that said, I think I can say that we successfully met our first 2013 objective, to commercialize and launch our own IGI labeled products for the first time.

Now successfully meeting our first objective was a major driver for achieving our second strategic [indiscernible] for 2013, that is to at least double our 2012 revenue and achieve profitability. We ended 2013 with over $18.2 million in net revenue, compared to $8.6 million in 2012. That's an increase of 113%. In the fourth quarter alone, we recorded net revenues of $6.7 million compared to $2.3 million in the same quarter in 2012. In fact, we have successfully grown our top line over the last six consecutive quarters. Our revenue growth has been the result of not only our IGI label product launches, but also the growth of our contract manufacturing and formulation services business, which has grown 27% over last year. We successfully expanded our business with several existing contract service customers, and we did add two new customers in our contract and formulation services business.

In April 2013, we announced the execution of a three year turnkey supply agreement with a customer, which included a total of $3 million in minimum purchases over the contract life. In the fourth quarter of 2013, we began shipments under that contract.

In December of 2013, we executed a license development supply marketing agreement with a large multinational pharmaceutical company. This agreement does make IGI the developer and manufacturer of the generic topical pharmaceutical drug products, which will be licensed, marketed and distributed in United States by our partner. The product in this agreement was developed at IGI and we filed the Abbreviated New Drug Application associated with this product in December.

Remember though, our second objective was not only to at least double revenue, but to achieve profitability, and that's important to me, because as I have said in the past, I believe this business has to be able to fund its operations internally, and not rely on financing to fund operating losses. To do this, fundamental business profitability is key.

Our net income for the fourth quarter of 2013 was just shy of $700,000, compared to a net loss of $1.2 million at 2012, or a swing of $1.9 million year-on-year. For the year, our net loss was $0.1 million, essentially breakeven. Our net loss in 2012 was $3.9 million. Under any measure, I would say, that's incredible accomplishment, a swing of $3.8 million in net income. And again, its worth bearing in mind, that this company has not been profitable since 1997.

This behavior of focused, disciplined revenue growth and expense management will continue in 2014, so that we can continue to be profitable and invest those profits back into the research and development efforts that we have planned for 2014 that I will discuss in a minute.

Our commitment to our shareholders are extremely important to us and to me, and therefore our fiscal discipline and our high expectation of the entire IGI team will help us continue to keep our promises. Our financial success in 2013 helped us achieve the third strategic objective for the year. As you remember, we expected to expand our R&D pipeline through both organic R&D, and through product and intellectual property acquisitions, also expecting to file at least six ANDAs.

During the year, we acquired, transferred, manufactured and launched our first wholly-owned IGI label product, which was the Econazole Nitrate cream; and while all that was going on, we filed five more ANDAs with the FDA for IGI labeled generic topical products, and we filed a sixth ANDA on behalf of the partner I disclosed earlier.

Now look, I believe that R&D is the main driver value in our business, and its critical that we continue to expand our pipeline. We now have 13 ANDAs on file with the FDA and based on the most recent IMS data, the addressable market for these 13 ANDAs exceeds $300 million.

Overall, the generic comparable pharmaceutical market has more than doubled over the past couple of years, and the most recent IMS data indicated this trend is continuing. That's why we here at IGI are committed to rapidly increasing our pipeline of products that address this market.

And that brings me to the update of the fourth and final strategic objective for 2013. As I mentioned earlier, we expected to continue to improve gross margin on our business, through streamlining our manufacturing operations to create more efficiencies, adding more higher margin business, the contract services business, and obviously growing our own IGI label business. Our gross margin in 2013 were 34%, compared to 32% in 2012. During the fourth quarter, we achieved gross margin just over 38%. Based on the growth in our IGI label business, as well as the growth in the higher margin segments of our contract services business, which Jenniffer will discuss in her financial review.

So I think you could say 2013, our year of transition went as planned, or even a little bit better than planned. Believe me, we have an exciting future here at IGI, and now I believe we have proven to you, that we can keep our promises, we can execute our plan and we can build shareholder value.

At this point, let me turn the call over to Jenniffer Collins to continue the financial review of the quarter, and then I will talk a little bit more about our business in 2014.

Jenniffer Collins

Thanks Jason. Good afternoon everyone, and again, thanks for joining us today. Our total revenue for the fourth quarter of 2013 was $6.7 million, an increase of 191% over that same quarter of last year. Total revenue for the year was $18.2 million, an increase of 113% over 2012. Our 2013 revenue included $7.4 million of net revenues in the sale of our very own IGI label products, compared to just 17,000 in 2012.

We increased revenue $4.4 million over the same quarter last year. The increase was attributed to $3.2 million of revenue generated from our products, including our Econazole Nitrate Cream 1% which we launched in the third quarter. In addition to another $1 million of additional revenues generated from our contract manufacturing services business, and an additional $250,000 from our formulation services business.

Our IGI product portfolio includes three authorized generic topical prescription products, as well as our first proprietary product Econazole Nitrate Cream 1%. As customary in the pharmaceutical industry, our gross product sales are subject to a variety of deductions, which led to the $3.2 million of our fourth quarter net IGI product sales. When we record revenue from the sale of our IGI products, we make estimates of various allowances, which reduce product sales. These include estimates for chargebacks, rebates, cash discounts and returns and other allowances.

We have made adjustments to the investments for these deductions to-date, none of which were individually significant, and we will continue to monitor [indiscernible] closely, as our actual charges are presented.

As I mentioned, we grew our contract services business by $1 million this quarter. Our increased contract manufacturing revenue in the fourth quarter of 2013 was primarily attributable to one new pharmaceutical customer, as well as incremental orders from several existing customers.

Contract manufacturing services from our pharmaceutical customers represented 71% of our fourth quarter revenue, and that compared to 68% in Q4 last year. Sales of OTC products was 3% in both quarters, and our cosmetic product sales represented 26% of revenue this quarter, as compared to 29% last year.

In 2013, 61% of our contract manufacturing services revenue were generated from the sale of pharmaceutical products, and that compared to 48% in 2012. As you may recall, our contract manufacturing business is a make-to-order business, so there may be variability interest he percentage of our contract services revenue, resulting from the sale of our pharmaceutical products on a quarter-to-quarter basis. However year-over-year, we expect more of our contract business to result from sales to pharmaceutical customers.

We grew all of our business lines in the fourth quarter of 2013 compared to the same period in 2012, and that included an additional $250,000 of incremental revenue from our formulation services business. As Jason mentioned, we executed a joint development and commercialization agreement with a large national pharmaceutical company. In accordance with this agreement, we recorded revenue in the fourth quarter of 2013, in connection with IGI's successful completion and certain milestones, which included the submission of the ANDAs for this project [ph] in December.

As expected, year-over-year we experienced a decline in revenues from our contract formulation services business. We recorded significant revenue in 2012, particularly from a site transfer from one of our pharmaceutical partners, in addition from other formulation services work, which we provided to other pharmaceutical partners.

This helped to grow our contract manufacturing business in 2013. We started shipping commercial products related to those site transfers in the fourth quarter of last year, and while we expect to continue to offer formulation services in 2014 and beyond, we do not expect that this will be a significant part of our total revenue.

Typically, our margins for this business are much higher than our product sales margin, and as a result of the nature of the revenue. This $816,000 of formulation services revenue which we recorded in the fourth quarter, was extremely high margin. These services allow us to effectively leverage our R&D team, without incurring significant additional costs. Our gross margin of 38% in the fourth quarter of 2013 was higher than the gross margin of 34% recorded in 2012.

For the year, we increased our gross margins to 34%, compared to 32% in 2012. Our year-over-year improvement was due to the increased revenue from our pharmaceutical partners, as well as the launch of our own products, which improved gross profit in 2013, and offset the decline in revenue from our contract formulation services segment. As we successfully continue to add higher margin products to our mix of product sales, we expect our gross margins to continue to improve year-over-year.

With our significant increase in revenue in 2013, SG&A as a percentage of sale for 2013 was only 19%, and that's compared to 36% in 2012. We do plan to continue to manage our administrative costs, while expanding our customer base. But as we expand our topical prescription drug portfolio, and most importantly, continued profitability, we expect to make some 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 continue to invest in our R&D effort.

We spent $600,000 in the fourth quarter of 2013, and that's compared to just over $1 million in the same period last year. In order to continue to expand the pipeline and drive shareholder value, we expect to double our R&D spending in 2014, as compared to 2013. As we focus on expanding our portfolio of generic topical pharmaceutical products, and adding to the 13 submissions we have on file with the U.S. FDA. We plan to expand our R&D team and as you have seen, we plan to increase the number of filings for 2014 to at least 10.

In addition, some of our future filings will include additional costs for required outside testing, all of which will continue to increase R&D costs. We plan to manage that growth to be consistent with our strategic plan.

In the fourth quarter of 2013, IGI recorded net income of almost $700,000. This was for the first time in almost 30 quarters. For the year ended December 31, 2013, the company approached breakeven, with a net loss of only $84,000. Our entire team worked extremely hard to achieve this goal. We understand that scaling fiscal responsibility is critical to our success, and we have indicated that we plan to sustain profitability in 2014, keeping in mind that will be after the significant increase in R&D spending year-over-year I just mentioned.

As indicated in our results, on December 6, 2013, we declared a preferred stock dividend of 415,000 shares of our common stock, in connection with the mandatory automatic conversion of 1,550 shares of our Series C preferred stock into common stock. The company originally issued these shares of preferred stock on March 29, 2010, for which the holders were entitled to quarterly dividend, at an annual rate of 5%.

On December 6, 2013, the preferred stock in all accrued but unpaid dividends will require to be converted after the closing price of the company's common stock had exceeded three times the closing price on the issuance fee, for a period of 25 consecutive trading days, immediately proceeding December 6, 2013. The company issued 2.7 million shares of common stock in connection with this conversion. As a result of this non-cash preferred stock dividend in the amount of $1.3 million recognized upon the mandatory conversion of the company's Series C preferred stock, net loss attributable to common stockholders was $1.4 million for the year ended December 31, 2013. As of today, the company does not have any preferred stock outstanding.

In 2103, we used $618,000 of cash in our operations, which included $2.7 million of R&D spending. So that means, we generated over $700,000 of cash from our operations in the fourth quarter of 2013. We are going to continue to invest in R&D, manage our operating resources and increase our sales efforts, in order to ensure that we continue to meet these goals. We are intently focused on financial discipline that's required to execute the day-to-day management of cash; and Jason and I are committed to sustaining profitability in 2014, by utilizing our existing resources and managing our spending, to ensure we meet our expectations.

As Jason said, this company has not been profitable since 1997. So reaching profitability in 2013 was an incredible turning point to this organization. Having our own operations generate cash, enables us to continue to reinvest in our future, and allow us to the opportunity to explore additional opportunities to accelerate growth.

In 2013, our cash use in investing activities was $2.1 million, which included almost $1.9 million to complete the purchase of the Econazole Nitrate Cream 1%, and the remaining $200,000 related to funds spent on some minor capital expenditures.

Our cash from financing activity totaled $2.3 million for the year, which included $2 million of funds we drew on our credit line earlier in 2013. As a result of our performance in 2013, we have additional access of $2 million on our existing working capital lines.

Things have been progressing very well on our investor communication front. We have been invited to the Roth Conference in March and the Needham Conference in April. We are speaking to different institutions and investors almost daily, many of whom -- who are hearing the IGI story for the first time. So it is certainly exciting to be attracting new potential investors. We also add additional [indiscernible] for 2014, and Jason and I are committed to continuously improving our communication with our investors and potential 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 will now turn the call back to Jason for his closing remarks.

Jason Grenfell-Gardner

Thanks Jennifer. So now let me talk to you a bit more about 2014. As Jennifer mentioned, we have three core goals in mind for this year of our business transformation in 2014. First, revenue growth between 40% and 45%; second, continued profitability; and third, a significant investment in R&D, to allow us to file at least 10 ANDAs during the year.

On the revenue side, we intend to continue to grow our IGI label business and our contract business year-on-year, this is simply down to continued disciplined execution of our business plan, and I am confident that our team can deliver. With this growth in revenue, we will be able to continue to see profitability, even while making the necessary investments in R&D to drive our pipeline. We are also actively recruiting to expand our R&D team, which will help us support our goal to file those 10 ANDAs in 2014, and just as an update, we are in active dialog with the FDA on six of our pending applications. We have a couple of submissions on file, that have recently passed their third anniversary as pending files with the FDA, and as you know, the average review times of the FDA still hovers around three years.

While this waiting game with the FDA is not ideal, I can't say with confidence, that we have made progress on our pending applications and we do see forward momentum.

Despite this ambitious plan to more than double our spending in R&D in 2014 over 2013, based on revenue projections, we will be able to sustain profitability in 2014.

As you heard, we have high expectations for our team for this transformational year. The challenge we face is significant, but we are ready for this challenge, and we are committed to continuing our financial discipline, while we find additional ways to accelerate the growth of our business. We remain dedicated to our mission to become one of the top five leading companies in the generic topical pharmaceutical industry.

As ever, I am grateful for your support, and for this opportunity to serve IGI shareholders.

At this point Sarah, we are happy to take questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions). You have a first question from Scott Henry from ROTH Capital. Please proceed.

Scott Henry - ROTH Capital

Thank you and congratulations Jason and Jennifer on hitting all of your goals and getting back to profitability. Certainly not a minor accomplishment, I believe. I do have a couple of questions; for starters, you sound positive with regard to the relationship with the FDA on the active dialog. You gave out your guidance of 40% to 45% revenue growth in 2014. Does that include any new product approvals, or is that strictly the legacy business?

Jason Grenfell-Gardner

Thanks Scott. Thanks for calling in. So, in terms of our 2014 business model, we do include revenues from some new product launches that we anticipate during the year.

Scott Henry - ROTH Capital

Okay. Could you give us any idea of -- where did Econazole Nitrate come in, in the quarter? I usually try to break that [indiscernible] part, but its up to you, if you want to give that kind of granularity?

Jenniffer Collins

Hi Scott, its Jennifer. I think from a quarterly perspective, we are going to do the IGI label sales together right now. So I think we are going to continue to do that, and I think we mentioned that in the call, that it was $3.2 million of our sales in Q4.

Scott Henry - ROTH Capital

Okay. The R&D income line, obviously very strong in Q4. Should we continue to kind of look at that on an annual basis and expect it to be choppy, or is there anything unique to Q4 that should carry forward?

Jenniffer Collins

I am sorry, R&D revenue line?

Scott Henry - ROTH Capital

R&D income line, yes. Revenue line.

Jenniffer Collins

I think, as we have kind of talked about in the past, that revenue line is really based on our achievement of milestones. So in Q4, we achieved several milestones under that new contract with a large pharmaceutical company, that allowed us to recognize a significant portion of revenue in Q4, more than we had recognized [indiscernible]. I think that we will continue to see -- depending on the size of the contracts that are open at the time, you will continue to see that choppiness on a quarterly basis. We talked a little bit about, we don't anticipate that that will be a significant part of our revenue in 2014, but that line will still be there.

Scott Henry - ROTH Capital

Okay. Then SG&A in the quarter was about double the prior quarter. Is there any noise there, or what should we think about as a quarterly rate going forward?

Jenniffer Collins

For 2013, the fourth quarter included some year end costs as well as the additional compensation accruals for the fourth quarter, which I think made that number a little bit higher than previous quarters. I think that on a year-over-year basis, as a percentage, you will still see a slight decline year-over-year, as revenue continues to increase.

Scott Henry - ROTH Capital

Okay. Thank you. That's helpful. Then when we think about 2014, the sequential progression, do you expect to be profitable in each individual quarter, or for the year as a whole?

Jason Grenfell-Gardner

I think our goal is to be profitable for each individual quarter, and because the real balance here is the driver of our ability to accelerate R&D expenses, that's kind of the throttle there, right? So to the extent our business is doing better, we will be able to invest more in R&D, to the extent that its not performing well. We want it to be -- we would invest less in R&D. But on a quarter-by-quarter basis, we anticipate continuing be profitable.

Scott Henry - ROTH Capital

Okay, great. That's helpful. And then, Jason, obviously you filed six ANDAs in 2013, and you're going to file 10 in 2014. Can you give any color on how the ANDAs in 2014 relate to the 2013 ANDAs? Are you going after more difficult targets, are you taking more risk? Is there any sort of profile we should think about in the ANDAs that is changing, or is it just still, going after the low hanging fruit?

Jason Grenfell-Gardner

We have only just talked about the profile of these ANDA targets of being sort of three distinct categories. One category which is -- doesn't require much in the way of bioequivalence. Second category, which requires some degree of bioequivalence, and a third category, which essentially requires one to repeat clinical and [indiscernible] studies. I would say that we are still focusing on those first two categories, but on balance compared to previous years, there will be more things that have a higher degree of bioequivalence than perhaps in the past.

Scott Henry - ROTH Capital

Okay great. Well thank you; thank you both for taking the questions, and congratulations again.

Jason Grenfell-Gardner

Thank you so much for your time.

Jenniffer Collins

Thanks Scott.

Operator

Our next question comes from Alan Troy, private investor. Please proceed.

Unidentified Analyst

Hi Jason and Jennifer. Just wanted to say, what a fantastic turnaround for IGI. The entire team at IGI did an exceptional job, and keep up the good work and congratulations. You guys did a fantastic job and I am glad to hear that the next year is going to be even better.

Jason Grenfell-Gardner

Thanks Alan. Its great to hear from you and thank you for your continued support of IGI. Means a lot to us.

Operator

All right. Our next question comes from Richard Siracusa from Merrill Lynch. Please proceed.

Richard Siracusa - Merrill Lynch

Hello Jason and Jennifer. It goes against my brain to say congratulations for a great quarter and all that stuff, because everybody says it. But you guys really deserve it. You have executed probably as well as any company I have seen in the many-many years I have been in the business. So congratulations. In any event, of the $300 million at your -- the ANDAs that you filed [indiscernible] address, and whatever the amount of money -- the market share that the new ones will address, what percentage do you feel you can capture?

Jason Grenfell-Gardner

Richard, that is a really good question. So first, thank you for your kind thoughts, we appreciate it. We focus here on execution. Once every three months, we get to show you what we did. So it has been a lot of fun, this past quarter.

Looking at the addressable market, eventually it sort of comes down to [indiscernible] analysis announcements, because each of them has some different dynamics in terms of the number of competitors, the likelihood of future entrants and so on. But that being said, and I think Scott Henry who we had earlier here, has done some more -- so if you think about a uniform distribution of these, and of course, some of them will be smaller, some of them will be larger.

I think there are two factors that one generally tries to model in. So first, if it’s a $300 million market today, is there any discount to that market that's required, in order to take up share? And what I would generally say is that, as people model the generic industry, they may look at anywhere from a 5%, 10%, 15% to 20% discount to market in terms of just the sort of entry price.

The second thing is, as you then say, okay, now that I have that market, what am I going to get out of it? Knowing of course as I said that these markets are all very different, but I would point to as what we have achieved so far in our existing portfolio. And there, if you look at our market shares there from the IMS data, they range from 15% to 20% in three player markets, to 40% to 55% in two player markets, and much of that just depends on the dynamics of the individual markets. So I have to let you do that math yourself, but I think, given the execution that we have done, already against some very big installed competitors out there, I feel confident that we are going to be able to pick up a meaningful share and an appropriate share, given the competitive landscape.

Richard Siracusa - Merrill Lynch

Okay. Now the 13 that you plan to file in 2014, what's the market size of those 13, in total?

Jason Grenfell-Gardner

So we plan to file 10 in 2014 and I don't have that exactly in front of me. So I will have to double check that for you. But as we launch them, or as we file them, we will be able to give people information about that.

Richard Siracusa - Merrill Lynch

Okay. Thank you very much.

Jason Grenfell-Gardner

Sure.

Operator

All right. Our next question comes from Frank Gerardi from Univest. Please proceed.

Frank Gerardi - Univest

Hi Jason, Jennifer, and congratulations. Two questions I had were asked by Mr. Henry and Mr. Siracusa, but I will ask one, the funding of the R&D moving forward, do you believe that the funds coming in for this multinational drug company and your credit line will be sufficient, or will the public funds be needed too for the 2014?

Jason Grenfell-Gardner

Great question Frank, and good to hear from you. When we talked here a lot about financial discipline, and when we talk about financial discipline, it means being able to pay for what we want to do through internally generated cash. So, those lines that Jenniffer referred to, are generally what we use as part of our working capital right, so when we are financing inventory or accounts receivable, that's the primary driver of that.

For R&D spend, the real driver of the financing for R&D spend comes from the cash generated from our operations, either due to sales of our contract services business, or through the IGI label business. And as in the fourth quarter of 2013, our models indicate that for 2014, based on the way our business is currently running and projected to run, we will be able to fund that uplift in R&D expense through our operations.

Frank Gerardi - Univest

Thank you. That's encouraging to hear, and again, I can't tell you how pleased I am with the execution of your business plan, and congratulations to all and continued success.

Jason Grenfell-Gardner

Thanks a lot.

Jenniffer Collins

Thank you, Frank.

Operator

All right. Our next question comes from Leo Resnick from Leo Resnick MD [ph]. Please proceed.

Unidentified Analyst

Thank you. Frank, I just -- one of the questions I was going to ask, but the other question is, are you optimistic that the FDA will be granting one of these ANDAs in the next few months?

Jason Grenfell-Gardner

Leo, thanks for calling in. Gosh, I sure hope so, and we were talking about this, prior to this call that it becomes incidentally boring to talk about how we hope the FDA will do their thing. What I can say is that in our recent discussions with the FDA and our recent correspondence with them, looking at the various steps required to get these products approved. We had some transparency in terms of where each of these products are in each of those stages, and judging by what we see, we are certainly on track for products being approved in the near future, and I will be very happy to be able to say that, once its done.

So, the answer is yes and you just have to keep executing.

Unidentified Analyst

Last question, the company that you are working with, when will they be named?

Jason Grenfell-Gardner

I imagined that they will probably be named, once the product is launched. So that will be, well again, depending on the FDA's timelines. But that's sort of their choice.

Unidentified Analyst

Okay. And how well do you feel this product launch may take for the company? Are we talking about six months, a year for the FDA to -- I guess we don't know, but do you have an idea, is it a few years down the road?

Jason Grenfell-Gardner

Well again, that's a great question. I guess its another one of these ANDA filings. So we filed it in December of 2013. We hope that the FDA's approval times are going to shorten on the coming years, particularly now that we pay them these generic drug user fees, as well as filing fees and a number of other fees that are meant to be employed to reduce approval times. So I can't tell you whether its going to be 32 months or 28 months or 26 months or something like that. But I do sense, and particularly hearing from the acting commissioner, at the Generic Pharmaceutical Manufacturers meeting last week, that there is certainly lot of activity going on there, to [indiscernible] hit those reductions in approval times. I am confident that we will see it faster than perhaps those things in our legacy pipeline.

Unidentified Analyst

With this company, is it just one product, or do they have additional products that they want to produce? Are any of those additional [indiscernible] pretty through this year?

Jason Grenfell-Gardner

So currently we have only agreed on one project. There is certainly willingness and perhaps an appetite from their side to do more. I think that the management team, we have to balance that against the need to progress it on the pipeline. Our R&D resources are finite and I think in terms of the hierarchy, we generally prefer to progress our own R&D pipeline before doing some of these partnership deals, and has to be fairly compelling financial reasons for us to do those sorts of deals. So right now, the [indiscernible] we have for 2014 would all be IGI label products.

Unidentified Analyst

Thank you very much.

Operator

There are no further questions in queue.

Jason Grenfell-Gardner

Okay. Well there are no further questions, then it remains for me to say, thank you again for joining us on this call.

Operator

Sorry to interrupt, we do have one more question if you want to take it?

Jason Grenfell-Gardner

Sure.

Operator

Its from Robert Bunki [ph] from Salford. Please proceed.

Unidentified Analyst

Hi Jason. Sorry for getting late in. I have a few questions. Great quarter. Quick question, can you talk to us about pricing trend that you are seeing right now in the topical generic space?

Jason Grenfell-Gardner

Hi Robert. Its good to hear from you. So, what we have seen over the course of the past, three or four years, in the generic topical space, is a significant increase in prices. If we look at the data from 2010 to 2013 through November, we see that the market has grown to about just shy of $4 billion, and that's cumulative average growth rate over the past three years of, just over 42%. The market has grown significantly, and that's largely driven by price. We continue to see some tight supply issues around certain products in 2013, and into 2014. What I would say is that, right now pricing appears to be relatively stable. Although the bias is probably towards the upside. So right now, the pricing environment is pretty favorable for IGI.

Unidentified Analyst

Excellent. Thank you very much.

Operator

All right. That does clear our queue. There are no further questions.

Jason Grenfell-Gardner

All right. Thanks Sarah. Well again, thank you all for joining us on the call. We look forward to continuing to execute this business plan in 2014, and I hope we are going to see some of you at the upcoming investor conferences this year. So once again, thank you and thank you for your support and have a great afternoon.

Operator

All right. Thank you very much. that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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