Teligent, Inc.
Q1 2013 Earnings Call Transcript

Published: 25 Apr 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the Q1 2013 IGI Laboratories Earnings Conference Call. My name is Derek and I’ll be your conference operator for today. (Operator instructions.) As a reminder, this conference is being recorded for replay purposes. I would now like to read the Safe Harbor

[Jason Grenfell-Gardner:]

Thank you, Derek, and good afternoon ladies and gentlemen. Welcome to the IGI Laboratories business update covering Q1 2013. I am Jason Grenfell-Gardner, the President and CEO of IGI and I am joined by Jenniffer Collins, our Chief Financial Officer. Thank you for joining us today. I’ll discuss highlights of our business performance and strategy for the future and Jenniffer will then review our financial results for Q1. As you can see from our press release issued earlier today, IGI has accomplished quite a lot since the company reported results in Q1 2012. IGI has now begun successfully commercializing our IGI label product and we’ve continued to grow our core business. With just over 40 people on our IGI team, we’ve been able to grow total revenue for our company to $3.7 million in Q1 2013. That’s more than double our total revenue at this time last year. As we’ve discussed on the last few calls, the key to our strategy centers on the growth of our business and the achievement of profitability. In order to grow this business we knew we had a lot of work to do, and we narrowed our focus to three distinct areas

[Jenniffer Collins:]

Thanks, Jason. Good afternoon, everyone, and again thanks for joining us today. Total revenue for Q1 2013 was $3.7 million, an increase of 101% over the same quarter last year. In addition, our total revenue this quarter increased sequentially 60% over Q4 2012. Our total revenue increase of $1.9 million as compared to 2012 was attributed to $1.4 million of revenue generated from the launch of our first three IGI labeled products and $500,000 of additional revenue generated from our contract services business. Our IGI product portfolio now includes three authorized generic products which we have sold to wholesalers and retailers under the contracts put in place over the last few months. Now that we’re selling IGI labeled products I’d like to take a few minutes to talk about the accounting treatment for that. As customary in the pharmaceutical industry, our gross product sales are subject to a variety of deductions which led to the $1.4 million of our reported net IGI product sales. When we record gross revenues from the sale of our products, we make estimates of various allowances which reduce product sales. These include estimates for chargebacks, rebates, cash discounts and returns, and other allowances. Currently these provisions are based on industry standards as well as our existing contracts with our customers. As we obtain actual data over time we will continue to evaluate and modify these estimates based on historical payment experience, historical relationship to revenues, estimated current inventory levels, and our contract sales terms with direct and indirect customers. The provision for chargebacks is our most significant gross-to-net sales allowance. A chargeback represents an amount payable in the future to a wholesaler for the difference between the invoice price paid to us by our wholesaler customer for a particular product and the negotiated contract price that the wholesaler’s customer pays for that product. Our large wholesaler customers represent the majority of our chargeback allowance. We will continue to monitor current pricing trends and other inventory levels to ensure the liability for future chargebacks is fairly stated. As I mentioned, we grew our contract services business by $0.5 million as compared to Q1 last year. As you may remember, in 2012 we recorded almost $2 million in revenue related to our contract formulation services business. During Q1 2012 we executed an agreement with a pharmaceutical customer which included the site transfer of one of their pharmaceutical products which previously had been manufactured in another facility. We began to manufacture this product in Q4 2012 and this customer then represented a significant portion of our product sales in Q1 2013. The turnkey manufacturing of pharmaceutical products is an efficient use of our existing capacity and allows better visibility for our capacity planning as the ordering patterns of our pharmaceutical partners are much more predictable. And these products typically allow for better margins than the products manufactured for our cosmetic partners. Our gross profit increased to 30.1% in Q1 2013, up from 25.4% in the same period last year. The launch of our IGI labeled products in addition to the shift in our product mix to include more products manufactured for our pharmaceutical partners helped improve our margins in 2013. In Q1 2012, out of all of our contract service revenues 48% came from pharmaceutical products, 4% from OTC products, and 48% from cosmetic products. This year we saw a significant change in the product mix. In Q1, 64% of our contract services revenue came from pharmaceutical products, 1% from OTC products, and 34% from cosmetic products. The margins for products within each product type can vary significantly. For instance, as Jason mentioned in Q1 we executed a three-year turnkey agreement to manufacture some cosmetic products for Juventio. These products utilize our proprietary Novasome technology and as such will generate higher margins than our typical cosmetic products. This agreement has a total minimum commitment of $3 million in purchases over the term of the agreement and we’re scheduled to begin to manufacture those products this quarter. With the significant growth in revenue, SG&A as a percentage of sales for the three months ended March 31, 2013, as compared to last year was only 18% this year and 36% in the same three months last year. We do plan to continue to manage our administrative costs while still expanding our customer base, and we’ll expand our topical prescription drug portfolio. And more importantly, as we reach profitability we will make some additional investments in sales and marketing in order to successfully place these products in the market. As Jason pointed out, the value creation for this business is in our R&D pipeline. To that end we spent $700,000 in Q1 as compared to $500,000 in the same quarter last year. Our R&D investment included fees related to our one ANDA filing in Q1 in accordance with the fee structure (inaudible) from the US FDA that was implemented Q4 last year, and of course the addition of Dr. Ken Miller as our Senior Vice President of Research and Development in December of last year. We expect to continue to increase our R&D costs as we focus on expanding the development of our portfolio of generic topical products and adding to the ten submissions we already have on file with the US FDA. Net loss for Q1 was $0.01 per share as compared to $0.02 per share in the same quarter last year. Our net loss of approximately $257,000 included $658,000 of R&D expenses. Year-to-date we’ve used $1.6 million of cash in our operations. While this does include the $700,000 used for R&D expenses you will see that the launch of our IGI label products resulted in a significant investment in our accounts receivable for the first three months of 2013. Our accounts receivable increased $1.5 million as compared to December of 2012. While we do expect this investment to continue over time, as our customer relationships mature we expect this investment will result in reaching profitability in 2013 as projected. We will continue to invest in R&D and will manage our operating resources and increase our sales efforts in order to ensure that we meet this goal. Execution of our strategy will allow us to generate cash in this business and will allow us the opportunity to explore additional opportunities to accelerate growth. Our cash use and investment activities of $1.5 million included the $1.4 million which we paid Prasco, a private pharmaceutical company located in Ohio, in February of 2013. We are obligated to pay them an additional $400,000 upon completion of the transfer of manufacturing in the middle of this year. We did draw $1 million from our existing credit line and we’ve executed a term sheet with our existing lender to expand the lending capabilities under this agreement. Things have been progressing well on our investor communications front. We spoke at the 25th Annual ROTH Investor Conference sponsored by ROTH Capital in California next month. We’re scheduled to present at the 12th Annual Healthcare Conference at Needham & Company in New York City on this coming Tuesday. This presentation will be available via webcast on our website as well. We are also in the process of completing a project to update our IGI website to incorporate the new vision of our business and make it easier for investors to find information regarding our business. We’re actively talking to investors and potential investors and hope to add additional conference appearances to our list. Jason and I believe in IGI and we’re committed to meeting with investors and potential investors to improve our investor relations in 2013. And I’m always available to answer your questions so don’t hesitate to reach out. Jason and I are very grateful for your participation today and look forward to updating you soon. I’ll now turn the call back to Jason for his closing remarks.

[Jason Grenfell-Gardner:]

Thanks, Jenniffer. Before we turn it over to questions I want to provide just a couple further thoughts. Having launched our first IGI products and proven that we can achieve market positions, IGI has now completed that pivot to the pharmaceutical market that we set out and that we’ve been talking about. The next phase of our growth requires us to continue to accelerate our ANDA pipeline and to look for opportunities to add to our portfolio. Your team at IGI has been doing great work all of these past few months as evidenced by these results, and we’ll continue to drive IGI forward in the months ahead. I want to thank you again for your support during these past few months. Jenniffer and I have enjoyed having the opportunity to meet and speak with a number of you and we look forward to continuing to tell the IGI story. With that, Derek, I’d be happy to open this up for questions.

[Operator:]

(Operator instructions.) And our first question is coming from the line of Frank Gerardi, Univest Management.

[Frank Gerardi:]

Hi, congratulations to all of IGI for an outstanding Q1. I’m very pleased and I just have a couple of questions. One, with the site transfer of the Econazole Nitrate, do you expect margins to increase over the people you bought it from? That’s question number one.

[Jason Grenfell-Gardner:]

Well, I don’t think that we have necessarily the full picture of what the margin potential was at the previous marketers and we don’t have transparency to all of that. What I would say is that it’s a great opportunity for IGI. Anything that we can bring into the facility that helps contribute to overhead and to fixed costs is a benefit to us, and it will help to continue to make us more efficient.

[Frank Gerardi:]

Thank you. Second question is with the pending FDA approval of your first generic product, what do you expect the lead time to be from approval to launch once we see approval?

[Jason Grenfell-Gardner:]

I’d try to be as efficient as possible around that and it really depends on the degree of comfort we get around the approval timeline. If it’s something that we feel comfortable manufacturing certain stock at risk we will do that to be able to launch as quickly as possible. There’s no sense for us to have an approval and not be able to use it so we want to keep that delay as brief as we can.

[Frank Gerardi:]

Thank you and good luck next week with the Needham conference. Thank you again.

[Jason Grenfell-Gardner:]

Thanks, Frank.

[Operator:]

(Operator instructions.) The next question is from the line of Alan Troy, private investor.

[Alan Troy:]

Hi Jason. I don’t really have a question; I just want to congratulate the entire IGI staff for doing a fantastic job during Q1. It’s quite a turnaround. Revenues are really growing and it looks very promising. And I was also very pleased to see insider buying during Q1 which shows confidence in the company. Again, congratulations and keep up the good work.

[Jason Grenfell-Gardner:]

Thanks, Alan.

[Operator:]

Your next question is coming from the line of Marco Rodriguez, Stonegate Securities.

[Dan Trang:]

Hello, this is actually Dan Trang sitting in for Marco Rodriguez. A question about the new contract with the customer that’s $3 million over three years – am I correct?

[Jason Grenfell-Gardner:]

Yes, that’s correct.

[Dan Trang:]

I’m wondering how that’s going to be recognized in your financial statements. Do you plan to amortize that over time or can you give a little color behind that?

[Jason Grenfell-Gardner:]

It’s going to be driven on a purchase order basis. $3 million is the minimum order quantity commitment. It’s certainly not a ceiling and it’s actually broken down across three products, so there’s a sort of mix-and-match approach to that. So as these purchase orders come in and get fulfilled we will recognize that revenue and then at the end of any one-year contract period we’ll look to ensure that the minimum quantities have been fulfilled. If they have, great; if not, IGI has the ability to bill that customer for the difference. And that will be on an annual adjustment.

[Dan Trang:]

Okay. Following up, in regards to the product mix going from 48% for your large pharmaceutical orders to 64%, and that is obviously reflected in the margins – I’m kind of wondering what was the cause of that, to get that big shift.

[Jason Grenfell-Gardner:]

I think some of this comes down to the timing. As you’ll remember, in 2012 IGI recognized what I would say is significantly more revenue on the product development side as it facilitated the site transfers for some of our more pharmaceutical Rx customers. As you transition then into the actual manufacturing piece of this it’s going to affect your manufacturing mix and that’s just the natural ramp up and the natural lifecycle of those types of transactions, so I think that’s where it is now. There will continue to be, as ever in a contract manufacturing business there will continue to be some bumpiness to this but our goal is to try to continue to grow the more pharmaceutical Rx side of our business.

[Dan Trang:]

Thank you very much, Jason and Jenniffer.

[Jason Grenfell-Gardner:]

Thanks, Dan.

[Operator:]

At this time I’m showing no further questions in queue. I would like to turn the call back over to Mr. Jason Grenfell-Gardner for any final statements.

[Jason Grenfell-Gardner:]

Thanks, Derek. Thanks again everyone for participating on this IGI earnings call. We look forward to seeing some of you at the Needham conference in New York next week and we do encourage you, if you’re unable to attend, to listen to the presentation or to see the webcast which will be on the website. Also as a reminder our Annual Meeting will be May 22, 2013, and all shareholders are welcome to join us at that shareholder meeting in New York. Thanks again and have a great day.

[Operator:]

Ladies and gentlemen, that concludes today’s conference. We thank you for your participation and you may now disconnect. Have a great day.