IGI Laboratories' CEO Discusses Q1 2014 Results - Earnings Call Transcript

| About: Teligent, Inc. (TLGT)

IGI Laboratories, Inc. (IG) Q1 2014 Earnings Conference Call April 29, 2014 4:30 PM ET

Executives

Jason Grenfell-Gardner – President and CEO

Jennifer Collins – CFO

Analysts

Matt Hewitt – Craig-Hallum Capital Group

Frank Gerardi – Univest

Michael Hahn – Hahn Securities

Operator

Good afternoon ladies and gentlemen and welcome to the First Quarter 2014 IGI Laboratories Earnings Call. My name is Ryan and I will be the coordinator on today’s event. At this time, all participants are in listen-only mode. Later we will be opening for questions and answers. [Operator Instructions]

Except for historical facts, the statements on this call or other written statements made or to be made by IGI Laboratories 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 the 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.

Now, I’ll turn the call over to your host Mr. Jason Grenfell-Gardner, President and CEO of IGI Laboratories.

Jason Grenfell-Gardner

Thank you, Ryan. Good afternoon ladies and gentlemen and welcome to this IGI Laboratories business update covering the first quarter of 2014. I’m Jason Grenfell-Gardner, the President and CEO of IGI and I’m joined today by Jennifer 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 Jennifer will review our financial results for the quarter, and finally, I will discuss our progress towards our key goals for 2014.

2014 is a year of transformation in IGI, as we accelerate our business and solidify the foundation for future growth. Remember that in 2013 we transitioned our business from relying solely on contract services by introducing four IGI labeled generic topical pharmaceutical products, while at the same time maintaining and growing our contract services business.

As a result of the diligent efforts of your team at IGI, we grew the overall business by 113% and broke even for the first time since 1997. Now, we’re said on moving even faster to transform our business and remain dedicated to our mission to become one of this top five leading companies in the generic topical pharmaceutical industry.

Now, as we set out our plans for this transformational year, I set forth three key goals for IGI. First revenue growth between 40% and 45%, second at least 10 ANDA filings with the FDA for generic topical pharmaceutical products, and third maintaining profitability in 2014, while doubling our R&D spend to drive shareholder value.

Now before I talk about the progress in the first quarter on these goals, I would like to pause for a moment and drawing your attention to a key milestone that IGI achieved in the first quarter. In March, the FDA improved the first organic IGI ANDA filing for a drug which is lidocaine hydrochloride 4% topical solution.

This is a huge milestone for us. As it represents the validation of the underlying IGI pipeline filed with the FDA. Indeed it confirms IGI’s ability to identify products and materials, conduct the necessary research and manage the regulatory process to get drugs approved.

Moreover, the IGI team is able to get this product approved in a 22 month timeframe compared to a market average of 32 months at FDA. While each filing reviews different, for me this speaks the quality of the work that we can do at IGI. While the market lidocaine hydrochloride is the smallest product in our pipeline with an addressable market of only $1.8 million.

It’s another product in our portfolio, another contributor to overhead absorption, another element of the growth story of IGI. We anticipate that, we’ll launch this product next week. Following the approval of the lidocaine ANDA, we now have 13 active ANDAs on filed with the FDA with the total addressable market of around $330 million based on data from IMS health as of February 2014.

Product launches like the lidocaine launch, help us drive both the revenue and margins at IGI. So let’s look at those three builds again. In terms of revenue growth, first quarter revenues were up 86% compared to the same quarter in 2013, and that included increase in IGI labeled products of 108%, but also an increase in our contract services business of 72% over the same period.

Let me talk about each of these businesses in turn. We ended 2013 with four IGI labeled products and eight presentations with the pending launch of the lidocaine topical solution that number will grow to five IGI labeled products. In addition, as part of our ongoing partnership with Medimetriks, we anticipate launching our fourth authorized generic product in the fluocinolone acetonide family. The fluocinolone acetonide 0.01% increase in May. This should mean that IGI will finish the second quarter with at least six products and 11 presentations before any further FDA approvals or product acquisitions.

Now let me turn to our contract services business. And this business is grown 72% over the same quarter last year and even grew 36% sequentially over the fourth quarter of 2013. But I think the really impressive fact here is that, we’ve grown this business while sticking to our goal of growing the share of pharmaceutical products, to gain product mix.

These prescription pharmaceutical products represented 71% of our contract manufacturing revenue in the first quarter of 2014 compared to only 64% in the same quarter last year. This is important, because these shifts help us to improve our underlying gross margins and indeed this help to contribute to our improvement in gross margin to 42% this quarter compared to just 30% for the same period last year. And of course it’s this growth in revenue, with gross margin improvement that allows us to execute our R&D efforts to drive shareholder value.

Turning our attention to the R&D program, I think it makes sense to remember the market that we’re trying to address through this growth. Based on the IMS health data, as of February 2014, the total generic topical market is now $4.5 billion, which is up from $2.4 billion in 2012 that is growing at a compound annual growth rate of 36%.

This growth is largely driven by a positive pricing environment in topical market, encouraged by the degree of market concentration. These two factors informed the sense of importance we have around IGI’s R&D program. Another major impact to our R&D program is the implementation of the Generic Drug User Fee Act passed in 2012 or GDuFA.

Two major impacts to the industry as the result of GDuFA implementation have been first an increase in the cost of filing drug applications both from filing fees and establishment fees. And second higher hurdle for the quality of submission through the FDA’s enforcement of new refuse to receive standards.

For IGI, the market forces together with the impact of GDuFA help drive our timing and investment in R&D. With changes to the FDA regulations coming at the end of June 2014, we’re working diligently to file a number of our 2014 target filings during the first half of this year.

As a result, first quarter 2014 R&D expense was $1.4 million nearly doubled the expense in the first quarter 2013 and the fourth quarter of 2013. We anticipated the expense from R&D will be higher in the second quarter of 2014 as we finished the clinical testing and paid the necessary filing fees associated with our generic drug R&D program.

Despite this high level of R&D spend, which we firmly believe drives shareholder value, IGI remained profitable for the first quarter of 2014, proving again our commitment to profitability and to the goals that we have set out to you. As a management team, we continue to manage expenses closely, while investing in those parts of our business that will drive shareholder value in the years to come.

We feel great about the progress we’ve made in the first quarter, revenues grew, margins improved, we maintained profitability and accelerated our R&D efforts and maybe, most importantly we received our first approval from the FDA for on ANDA. Our future is bright and 2014 as started us off on the right note.

At this point, let me turn the call over to Jennifer Collins, to continue the financial review of the quarter, and then I’ll wrap up with our formal remarks for the first quarter.

Jennifer Collins

Thanks Jason. Good afternoon everyone and again thanks for joining us today. Our total revenue for the first quarter of 2014 was $6.9 million, an increase of 86% over the same quarter last year. Revenue for the first quarter of 2014 included $2.9 million of net revenue from the sale of our own IGI labeled product, can here to just $1.4 million in the same period last year.

We increased revenue $3.2 million over the same quarter last year. This increase was attributed to $1.5 million of additional revenue generated from our first four IGI labeled products including our econazole nitrate cream 1%, which we launched in late September of 2013. And $1.6 million of additional revenues generated from our contract manufacturing services business.

Our IGI product portfolio, included revenue from three authorized generic topical prescription products as well as econazole nitrate cream. In the second quarter, we expect to launch our fourth authorized generic product in the fluocinolone acetonide family, in addition to the launch of our first IGI labeled product.

As customary, in the pharmaceutical industry, our gross product sales are subject to a variety of deductions, which include estimates for chargebacks, rebates, cash discounts, returns and other allowances.

We’ve made adjustments to these estimates to-date, none of which were individually significant, and we’ll continue to monitor our estimates closely, as the actual charges are presented.

As I mentioned, we grew our contract services business by $1.6 million as compared to the first quarter of 2013. Our increased contract manufacturing revenue in the first quarter was primarily attributable to one new pharmaceutical customer, as well as incremental orders from several existing customers.

Contract manufacturing and formulation services revenue from our pharmaceutical customers represented 71% of our first quarter revenue, as compared to 64% in Q1 last year. Sales of OTC products were 3% in Q1 of this year compared to 2% last year, and our cosmetic product sales represented 26% of revenue in this quarter, compared to 34% last year.

As you may recall, our contract manufacturing business is a make-to-order business, and there may be variability in the percentage of our contract services revenue, resulting from the sale of our pharmaceutical products quarter-to-quarter. However year-over-year, we expect that more of our contract business will result from sales to pharmaceutical customers.

All of this means, we grew all of our business lines in the first quarter of 2014 compared to the same period last year. Our significant revenue growth in the IGI label and contract manufacturing business and our more favorable product mix in the contract manufacturing services business enabled us to improve gross margins to 42% in the first quarter of 2014. This was significantly higher than the gross margin of 30% recorded in the same quarter of last year.

In frame of reference, margins improved sequentially as well over the fourth quarter of 2013. In that quarter, we recorded a gross margin of 38% and that margin included $816,000 of very high margin formulation services revenue. These improvements are attributable not only to our revenue growth, but to our increased efficiencies in our operations and the leverage of our operations that we continue to increase throughput at our facility.

As we successfully, continue to add higher margin products to our mix, as well as the addition of future IGI label products we expect gross margins to continue to improve year-over-year. SG&A as a percentage of sales for the first quarter of 2014 and 2013 was 19% of revenue.

SG&A in the first quarter of 2014, increased approximately $500,000 as compared to the same period last year, primarily due to increase in non-cash expenses related to stock-based compensation and expenses related to the performance based pay in 2014, as well as the additional professional fees.

SG&A expenses in 2014, also include additional legal fees. We do plan to continue to manage our administrative cost while expanding our customer base. But as we expand our topical prescription drug portfolio and most importantly our first profitability, we expect to make some additional investments in SG&A in order to successfully place those products at national and regional and local retail customers and properly support our growth.

Our short performance on all fronts during the first quarter allowed us to continue to invest in R&D. We’ve spent $1.4 million in the first quarter, compared to just $658,000 in the same period last year. In order to continue to expand the pipeline and drive shareholder value, we expect to continue to double our R&D spending in 2014 as compared to 2013. As we focus on expanding our portfolio of generic topical pharmaceutical product.

We planned to expand our R&D team and as Jason mentioned, we planned to file an additional nine filings at least this year. Additionally, our R&D cost in the first and second quarter of 2014 include cost for outside testing, all of which will continue to increase R&D cost in the first half of 2014. We planned to manage that growth to be consistent with our strategic plan.

In the first quarter of 2014, we recorded net income of $167,000 that for a second consecutive profitable quarter. We recorded a loss of $257,000 in the same quarter last year. As Jason discussed earlier, we understand fiscal responsibility is critical to our success, and we have indicated we plan to sustain profitability in 2014, and still may affect significant investment and R&D that we both talked about.

In the first quarter of 2014, net cash provided by operations were $68,000 and this included $1.4 million of R&D expenses. In the same quarter last year, our operations used $1.6 million. This company is now being profitable since 1997, so our maintaining profitability in 2014 is critical to this success. Having our own operations generating cash enabled us to continue to reinvest in our future and allows us to explore the opportunity for additional ways to accelerate growth.

In the first quarter of 2014, we used $68,000 in investing activities, primarily related to some minor capital expenditures. Our cash from financing activity totaled $318,000 in the first quarter of 2014, primarily related to funds received for the exercises of warrants and options. Now, we have access to an additional $2 million on our existing working capital lines.

Things have been progressing well on our investor communication front. We’ve intended the Roth Conference in March, the Needham Conference in April and the Healthcare Analyst at Craig-Hallum, Matthew Hewitt initiated coverage of IGI in April. We planned to attend their conference in May.

We are speaking to different institutions almost daily, many of whom are hearing the IGI story for the first time. So it is certainly exciting to be attracting new potential investors. We also add additional conference chart list for the rest of the year. 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.

We are grateful for your participation today, and look forward to updating you soon and hopefully seeing some of you at the Annual Meeting on May 29th.

I’ll now turn the call back to Jason for his closing remarks.

Jason Grenfell-Gardner

Thanks Jennifer. I think we can all agree IGI is continued to execute on its plan, keep its promises and build shareholder value. With the second quarter changes and the guidelines for new ANDA submissions, our team is going to be extremely focused this quarter as we seek to continue to grow at the top-line of our business, improving the product mix to help improve margins, in order to support the additional R&D spending required to build out our R&D pipeline.

Our team is proven that they are up to this challenge. We all remain dedicated to our mission to become one of the top five leading companies in the generic topical pharmaceutical industry over the next few years. As Jennifer said, we look forward to seeing some of you at our upcoming Annual Meeting as ever, I’m grateful for your support and for the opportunity to serve IGI shareholders.

At this point, Ryan we’re happy to take any questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Matt Hewitt with Craig-Hallum Capital Group.

Matt Hewitt – Craig-Hallum Capital Group

Good afternoon and congratulations on the progress.

Jennifer Collins

Thanks Matt.

Matt Hewitt – Craig-Hallum Capital Group

I’ll ask a few questions, and may be hop back in the queue. As far as Q1 was concerned the mix was a little bit different than I guess, I had anticipated, specifically your labeled products were down sequentially, I’m wondering if there were something, not -non-traditional or something that occurred in Q4 that didn’t get reflected in Q1 and should we expect obviously with the ANDA approval, should we expect that a bounce back up here in Q2?

Jennifer Collins

Hi, Matt, thanks so much for joining us today. I think that what we talked about on our fourth quarter call couple of months ago was that, this fourth quarter was really the launch of the econazole nitrate cream product. So there, we’re definitely been stocking orders in some initial orders that were in the fourth quarter that, definitely added to revenue. And I think that there were some shortages in the marketplace that were added to some additional orders from some of our customers. I think that, now we’ve gotten to probably for the existing product portfolio this quarter probably represents the national rate for 2014.

Matt Hewitt – Craig-Hallum Capital Group

Okay. That’s helpful. And I’m sorry, I missed it on your Q4 call. As far as with the lidocaine 4%, if you launch it next week, how quickly do you think that you can get to your normalized market share in the, upcoming quarter?

Jason Grenfell-Gardner

Hi Matt, it’s Jason. I think normally, we kind of somewhere between three and six months depending on the class of trade and how competition responds. But I think that three to six months is a fairly good benchmark.

Matt Hewitt – Craig-Hallum Capital Group

Okay. And are you anticipating any or have you maybe even at this point seeing since your approval anything from a pricing standpoint that, would help us know whether or not that eight point million is going to stick or, what are you anticipating, I guess from a market perspective?

Jason Grenfell-Gardner

Well, we don’t really give forecast on a product specific basis, but, what I can say is, I know that our sales group is going to work diligently to try to make sure that we get the right balance of pricing and market share as we try to launch the product.

Matt Hewitt – Craig-Hallum Capital Group

Okay. All right, fair enough. And then as far the econazole nitrate contribution in Q1, it sounds like your stocking orders, you would add a normalized run rate, how should we be thinking about that, this might be tricky, I don’t know if you even will answer this, but trying to understand that contribution as a part of the IGI labeled products is that a significant component of that is it half of it, how should I be thinking about it?

Jennifer Collins

Is which a significant component the new product?

Matt Hewitt – Craig-Hallum Capital Group

The econazole, yes.

Jennifer Collins

I mean, I think, again, kind of back to Jason’s point we don’t kind of give data on per product basis and that portfolio is just as a portfolio so small right now. I think that, I think overall from a revenue perspective for the four distinct products, I think Q1 was pretty representative over the 2014 run rate on a quarterly basis.

Matt Hewitt – Craig-Hallum Capital Group

Okay.

Jennifer Collins

Anytime we were going to introduce the new product keeping in mind these market sizes of the products that we’re introducing this quarter.

Matt Hewitt – Craig-Hallum Capital Group

All right, understood. Maybe one last one from me, and then I’ll hop back in the queue. Have you had any recent dialogue with the FDA, you would provided in last update here on your Q4 call, but it was there any update even since then as far as letting, how things are progressing from your pipeline?

Jason Grenfell-Gardner

Really the agency seems to have gone back to, I guess active review phase, which is a way of saying that they have been relatively quiet. I mean, I think that that’s been reflected in data throughout the industry. We’ve seen approvals and response letters some dwindle over the course of the past couple of months. So, we can’t really project what that should indicate, but we continue to response to questions from the FDA when they provided to us, we then need to enquire on a regular basis about the progress of certain materials already with them. And we trust that they were generally working to work their way through that pipeline.

Matt Hewitt – Craig-Hallum Capital Group

Okay, all right. Thank you very much for the update. I’ll hop back in the queue.

Operator

Next question comes from Alan Troy, Private Investor.

Unidentified Analyst

Hi Jennifer and Jason, congratulations on a good quarter.

Jason Grenfell-Gardner

Thank you.

Unidentified Analyst

You guys have a great story to tell, do you plan on attending any health conferences in the upcoming quarter, the second quarter, because every time you seem to go on these conferences, it gives the stock price quite a boost?

Jennifer Collins

Hi Alan, thanks for joining us today. We are going to try and make out too many applets for Craig-Hallum’s conference, which is through the end of May. And then I’m working diligently to get some more on calendar for the rest of the year. So hopefully we’ll be able to update you on that. We do have our Annual Meeting at the end of May as well.

Unidentified Analyst

Right. Was that strong recommendation, you just got from that company was that based on then maybe you at the conference and talking about it?

Jennifer Collins

We’ve been talking to Craig-Hallum for probably six to nine months trying to get them up to see it on the IGI story and then they did just once coverage couple of weeks.

Unidentified Analyst

That was great recommendation.

Operator

All right. Next question comes from Frank Gerardi from Univest Management.

Frank Gerardi – Univest

Hi, good afternoon. And again, congratulations on a great start to 2014. And Jason, you continued to hit every goal that you promised investors and with the lighted in Jennifer continues to do a great job in getting the numbers out way ahead of norm for a company that’s growing, congratulate you both. My question has to do with the growth of the company; I know in analyst, one analyst how does you growing to $45 million in revenues in 2015. As you continue to grow and since you’re doing contract manufacturing in the mix, what is IGI’s capacity, I mean now you’re running on one shift or two shifts, what type of revenues can you do in your present location. I know you own additional acreage joining IGI’s property, but what can we expect as far as growing pains here with continued growth of the company?

Jason Grenfell-Gardner

That’s a great question Frank, thank you so much. That’s what maybe we spend a lot of time over the few months, really trying to size, because it’s a bit of a challenging question just because, capacity and what we do is a function of compounding. So kilos or liters of products that we compound. And packaging which of course takes the form of metal tubes, laminate tubes, plastic tubes, bottles, jars and so on. So it’s a bit of multi-barrier problem. With that being said, IGI today works primarily one shift five days a week, has three compounding suites of which, we generally compound one product a day. We generally fill one product a day across our three filling lines.

In the model that we have, as we look at the growth rate of the business, we’re able to accommodate the existing demand at least through the beginning of 2017, perhaps the middle of 2017 through a combination of personnel changes, so we’re thinking about how we work our shifts, whether one shift, that’s full shift, two shifts or so on. And looking at the physical organization of our filling technology to ensure that we can use all of that filling technologies simultaneously with appropriate physical separation and maintaining cGMP.

So with those, simple steps in place, we’re probably able to move out into the beginning of 2017. Beyond that there are some smaller investments that our operation team as identified that should be able to add incremental capacity even that number. So, it’s certainly something that will cognizant enough, but it’s not something that today is an eminent concern.

Frank Gerardi – Univest

Well, thank you so much, and continue the great success. Thank you, again.

Operator

Next question comes from Michael Hahn with Hahn Securities.

Michael Hahn – Hahn Securities

I just want to congratulate you guys on excellent progress and keep up the good work. That’s all I have to say.

Jason Grenfell-Gardner

Thanks Mike its great hearing from you.

Operator

Okay and I have nobody else in queue. So Matt if you wanted to queue for a question you could. All right, now we have Matt in line again.

Matt Hewitt – Craig-Hallum Capital Group

The point later this year we start to make some incremental spend in that area, Q1 roughly call $1.3 million should we expect a step back then in Q2 and was, those are essentially going into R&D or how should we thinking about that from a progression this year?

Jennifer Collins

I don’t see, I don’t think we’ll see a significant step back in SG&A in the second quarter, just due to the rate of some of the expenses in that line are going to fall. But, I think that as a percentage of revenue in second quarter it should decrease slightly.

Matt Hewitt – Craig-Hallum Capital Group

Okay. And then as far as our R&D, you did talk about this in your prepared remarks there was $1.4 million in Q1 there will be some incremental cost there in Q2 as you scrambled to get some of these ANDA filings complete and then before the deadline. When we get into the Q3 and Q4, while you kind of think you fill out the gas a little bit or is this kind of the new run rate given your aggressive plans to rollout 10 ANDA this year and even more than that going forward?

Jennifer Collins

I think you looked at the rest of the, I think certainly Q2 is going to be the highest in terms of R&D spend for the year. So definitely little bit higher than Q1, it will definitely be this is kind of a standout quarter as we hope to get, not only additional filings in there, which have filing fees associated with those as well as closing out some of the outside testing of the clinical studies required by some of those filings to get done in by the June 20th deadline that Jason talked about.

I think that, when we look at the business overall, 20% of revenue is really the number we’re looking to target.

Matt Hewitt – Craig-Hallum Capital Group

Okay. All right, I think that’s it from me. Congratulations again on the progress.

Jason Grenfell-Gardner

Thank you so much.

Operator

Okay. And we have no other questions. So, I’ll hand it back to you then for any closing remarks.

Jason Grenfell-Gardner

All right, thanks Ryan. Well, if there are no further questions, we remain really to say thank you again for joining us on this call. We look forward to continue to execute here in 2014 and seeing some of you at the upcoming investor conferences this year. Thank you and good afternoon.

Jennifer Collins

Thanks.

Operator

Thank you everyone for your time and participation. That will conclude the call for today. So you may now disconnect and enjoy the rest of your week.

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