IGI Laboratories Inc. (IG) is a small-cap developer, manufacturer and marketer of generic topical pharmaceutical products that are bioequivalent to their brand name counterparts. By focusing on generic formulations, the company largely avoids costly clinical studies using the ANDA process rather than the typical NDA approval for new drugs.
Currently, the company has 14 ANDAs on file with the FDA that generally take around three years to approve. Management believes that the pipeline has a combined addressable market of approximately $330 million, based on recent data from IMS Health, and plans to file a total of ten ANDAs in 2014. These efforts should lead to stable long-term sources of revenue.
In this article, we'll take a closer look at why investors should consider IGI Laboratories despite its 250%+ move higher over the past 52 weeks.
Management is Executing
IGI Laboratories' President & CEO Jason Grenfell-Gardner joined the company on July 30, 2012 after spending over eight years at Hikma Pharmaceuticals plc and its subsidiaries. Before joining Hikma, Mr. Grenfell-Gardner worked throughout Central and Eastern Europe as a partner at Trigon Capital, a boutique investment bank focused on mergers & acquisitions.
Shortly after Mr. Grenfell-Gardner was appointed as President & CEO, Dr. Kenneth Miller was hired as Senior Vice President of Research and Development. Dr. Miller has over 20 years of topical and transdermal experience in both branded and generic pharmaceutical development. Prior to working for the company, he served as Senior Director of Mylan Technologies.
After operating at a loss since 1997, the new management team had a lot to prove to shareholders. Mr. Grenfell-Gardner outlined the company's plans to pivot into developing its own IGI-labeled generics shortly after he was hired in 2012, signed a deal with a large multinational pharmaceutical firm, and began building its robust pipeline of ANDA filings.
After doubling its revenues and expanding its margins to just over 38% in 2013, management reached another key milestone of becoming profitable for the first time since 1997. As CEO Grenfell-Gardner puts it, "I believe this business has to be able to fund its operations internally, and not rely on financing to fund operating losses."
All in all, management's ability to execute on its promises is perhaps the company's greatest quality.
Large & Growing Pipeline
IGI Laboratories' management believes that the pipeline has a combined addressable market of approximately $330 million, based on recent data from IMS Health, and plans to file a total of ten ANDAs in 2014. By comparison, the company's market capitalization hovers around $175 million, or roughly half of the $330 million figure (which doesn't include future ANDAs).
When asked what percentage of the pipeline would be realized, Mr. Grenfell-Gardner said that multiple factors were at play. First, investors should discount the number by 5% to 20% and then take a look at market shares that could range from 15% in three-player markets to 55% in two-player markets. These figures suggest the pipeline could generate around $30mm per year.
The generic topical pharmaceutical market has also more than doubled over the past couple years with IMS data indicating that these trends will continue. At the same time, regulatory changes at the FDA to expedite ANDA filings could help boost approval times and enable faster revenue growth. These two catalysts suggest that the pipeline could be worth more moving forward.
The company's growing pipeline is well positioned to accelerate its top-line growth over the coming years as approvals roll in.
Guidance Indicates Undervaluation
IGI Laboratories projected 40% to 45% revenue growth, sustained profitability, and at least 10 new ANDA filings in 2014. Assuming no improvement in margins, these figures suggest revenues of approximately $26 million and net income of approximately $0.06 per share. The company's growing pipeline also suggests higher cash flow generation in future periods.
Assuming the industry average 7.6x price-sales multiple, the company's stock should be trading at around $4.65 per share compared to its current $4.00 per share price. The price-earnings multiple suggests a much lower price, but investors should take into account the oversized R&D spending that subtracts from its potential gross and net margins.
Finally, investors should consider that its accelerating ANDA filings and the potential for faster FDA approval times could set the stage for faster realization of its existing $30mm per year in sales pipeline as well as more rapid time-to-market for the 10+ additional ANDA filings slated for 2014. These catalysts should keep its top-line growing at a fast clip for some time.
Given management's ability to execute, investors could see top- and bottom-line results accelerate in the future.
Conclusions & Takeaway
IGI Laboratories isn't quite the bargain that it used to be, but that's just because management has proven itself in 2013 and investors are starting to notice. Currently, the stock appears to be trading at a 16% discount to its 2014 price-sales multiple, but it's the 2-5 year potential in its ANDA filings pipeline that could unlock the real value in the stock.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in IG over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
