IGI Labs: A Conviction Buy For 2015

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About: Teligent, Inc. (TLGT)
by: Mario Squicciarini
Summary

IG’s current pipeline of ANDAs and recent acquisitions has an addressable market of $750M.

Should produce its first profitable year by meeting consensus estimates for Q4 Earnings.

Projected to grow sales 75% in 2014 and 89% in 2015.

200%+ return since 1/1/2014 is just the beginning of this story.

With the market hitting all time highs and many stocks appearing to be fully valued, investors have to look harder to find value moving forward. A company that exemplifies the "Growth at a Reasonable Price" strategy that many use is IGI Laboratories (NYSEARCA:IG). Located in Buena, New Jersey, this small generic pharmaceutical company is currently valued at ~$500 million and will have done $31 million in sales in 2014 if its Q4 reaches consensus estimates. A price to sales ratio of over 16 may not seem like a value, but with this company, it's all about the future.

Years from now, when either A) IG is worth several billion dollars or B) it has been acquired by a larger company, investors will look back to 2014 as the turning point. As proof of this, just compare the company of 2013 to the company that exists today.

2013:

  • $18.22 Million in Sales

  • ($0.03) Earnings per Share

  • 13 ANDAs Submitted, 0 Approved

  • A portfolio of 3 products each with different concentrations and formulations

  • Estimated pipeline addressable market ~$250 Million

2014:

  • Projected $31.89 Million in Sales

  • Projected $0.05 Earnings per Share

  • 22 ANDAs Submitted, 2 Approved

  • A portfolio including:

    • The same 3 products from 2013

    • The 2 approved ANDAs: diclofenac sodium 1.5% topical solution and lidocaine hydrochloride USP 4% topical solution

    • 17 approved injectable drugs and 1 suppository drug acquired from AstraZeneca (NYSE:AZN)

    • 2 approved ophthalmic products and the right to acquire 3 additional approved injectable drugs from Valeant Pharmaceuticals (VRX)

  • Estimated pipeline addressable market ~$700 Million

Looking at this comparison, you can see why the stock is up 225% year-to-date and 892% in the last 2 years. But even after this run-up, IG is still undervalued based on its future potential for growth. A management team capable of orchestrating the full metamorphosis that has taken place over the last year is sure to have plenty planned for years to come. One can assume this plan has already started as IG recently announced a $125 Million debt offering. There are countless possibilities as to what IG could be planning to do with this money. One could speculate that they are looking to make additional acquisitions. IG currently produces 3 different drugs in house, all of which are topical solutions, but they just acquired 20 new drugs this year, none of which are topical solutions. It would appear that IG may be in the market for new production facilities.

Looking at both revenue and earnings per share year over year, it becomes abundantly clear that 2015 is going to be a huge year. Analysts are expecting sales growth of 89% from $31.89 Million in 2014 to $60.40 Million in 2015. In addition to this, EPS growth of 420% from $0.05 to $0.26 is astronomical. If IG can meet or even exceed analyst estimates shares should continue their upward ascent.

That being said, it is no small task, even for a company of this size, to grow at this pace. If IG comes up short, it could be met with great pain for investors. Often times when high growth stocks with elevated multiples don't meet expectations, stock prices will plummet; IG is no exception. But if past performance is any indication, investors should not be too worried. IG beat Q3 sales estimates by 5.8%, missed Q2 by 1.7%, beat Q1 by 14.6% and beat Q4 by 19.6%. With an average beat of close to 10% per quarter over the last year, analyst estimates have proven conservative.

Pipeline

IG announced the submission of 3 ANDAs on Tuesday. This brings them to 9 submitted in 2014, 22 submitted total and 20 pending FDA approval. They estimated their portfolio of 17 drugs waiting for approval had a total addressable market of $465M so one can assume that these 3 new submission brings that number close to $500M.

More important than this, IG also announced its guidance for ANDAs in 2015; "We will submit 1 to 2 a topical treatment ANDAs a month". This would be around 18 more ANDAs next year and 40 total. In 2015 we should see a couple get approved by the FDA as well. The 2 that were approved last year in addition to any that are to be approved in 2015 will bring a considerable boost to revenue as they are working off a small base of $31M in sales annually.

Investors should be most excited about the AstraZeneca drugs coming online in 2015. This includes 17 injectables and 1 suppository drug and we'll effectively quadruple IG's portfolio size. This is not to say that IG's sales will quadruple, only the amount of products they offered. In their press release, IG stated that these 18 drugs have a total addressable market of $265M. In addition to this, 7 of these 18 drugs are on the FDA shortage list meaning there should be little competition. If IG can gain any significant portion of market share this should bring a boost to sales even greater than that of their organic products.

The drugs acquired from Valeant are just another catalyst to add to the list. With an addressable market of $38M they aren't going to move the needle by themselves, but IG has the option to acquire 5 others and if these are to come online in conjunction with the AstraZeneca portfolio it could be more fuel for the fire.

What Lies Ahead?

While having a large pipeline is great, it doesn't mean anything unless management can bring these products to market. For their 22 queue of 20 ANDAs, they are unfortunately at the mercy of the FDA. But as for their acquired products, management shed some light on when we could see them. In IG's press release subsequent to their acquisition from Valeant Pharmaceuticals, linked above, they stated that, "we hope to have these products in the market under our IGI label by the end of 2015". As for the AstraZeneca products, they stated in that press release that, "we look forward to working closely with the US FDA to return these products to the market as soon as possible".

Because of the lack of specifics about the AstraZeneca products, I would expect that this means IG will not have the same 2015 timeline they do with the Valeant products that they were so forthcoming about. With no information other than this, I would hope the AstraZeneca drugs would hit the market by 2016 at the very latest, but there too, IG is at the mercy of the FDA to return them to market.

Without including any future acquisitions IG may make, below is the pretty picture we are looking at for the coming year:

2015:

  • Projected $60.40 Million in Sales

  • Projected $0.26 Earnings per Share

  • 40 ANDAs Submitted, 2 Approved; more should be approved in 2015, but there is no way to predict how many

  • A portfolio including:

    • The same 3 products from 2013

    • The 2 approved ANDAs: diclofenac sodium 1.5% topical solution and lidocaine hydrochloride USP 4% topical solution

    • 17 approved injectable drugs and 1 suppository drug acquired from AstraZeneca

    • 2 approved ophthalmic products and the right to acquire 3 additional approved injectable drugs from Valeant Pharmaceuticals

  • Estimated pipeline addressable market ~$1 Billion

Although there are many risks to IG's performance in 2015, the risk is minute when compared to the risks of a pre-clinical or even clinical biotech company. For IG, most of their drug approvals are a matter or when rather than if. In addition, their competitive advantage lies in their size and appetite. Their pipeline consists of ~40 compounds and has a total addressable market of ~$700 million. Many of the large companies that would otherwise eat IG's lunch wouldn't go near a single drug with an addressable market of only $700 million, but IG is going after 40 drugs for that sum. The slice of pie they are going after is so small that other companies are simply letting them have it, as evidenced by AstraZeneca not even producing the 7 drugs it owned on the FDA Shortage list and then selling them away to IG. These drugs may not be worth the time of the $90 billion behemoth, but they will more than move the needle at IG.

The recent pullback below $9.00 offers long term investors a solid opportunity to jump in as 2015 is sure to be a year to remember at IGI Labs.

Disclosure: The author is long IG. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.