Teligent, Inc.
Q2 2013 Earnings Call Transcript

Published: 26 Jul 2013

[Operator:]

Good day, ladies and gentleman and welcome to the Quarter 2, 2013 IGI Laboratories, Inc. Earnings Conference Call. My name is Carla and I’ll be your operator for today. At this time, all participants are in listen-only mode. 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 in this presentation as well as oral statements or 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 prediction 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 Mr. Jason Grenfell-Gardner, President and CEO of IGI.

[Jason Grenfell-Gardner:]

Thank you, Carla. Good afternoon, ladies and gentlemen, and welcome to this IGI Laboratories’ business update covering the second quarter 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 and also give you an update on the execution of our strategy and then Jenniffer will review our financial results for the second quarter. We are about a week away from my first year anniversary at IGI and while there is still so much to do, I am very proud of the transition this company has made in just 12 short months. If you can recall back to this time last year, we ended the second quarter with $4.2 million in revenue for the first half of 2012, we didn’t have any products in our own label and we’d only just began to think about the commercialization strategy for our generic topical pharmaceutical portfolio. We had six ANDAs on file with the FDA. If you fast forward to today and we look at the end of the second quarter 2013, just one year later, look where we are. First we grew revenue 76% over this time last year to $7.5 million and improved margins. Second, we successfully executed our commercialization strategy and launched our first three IGI label products, which has generated total net revenues of $2.8 million thus far in 2013. And third, our contract services business has continued to grow and has grown to over $4.7 million, an increase of 10% over the first six months of 2012. On the R&D front, including yesterday’s submission we now have 11 ANDAs on file with the FDA, up from six a year ago. As I said, our whole team is aware that there is much more to do, but the one thing that I am now certain of is that we have proven that as a team we can execute. Turning back to the second quarter, I believe that this has been a settling in quarter for many of our key initiatives. It’s during the first quarter this year we were focused on the commercialization, the set up and initial launch of our first three products. And this quarter has been about fine tuning and ensuring that everything is running well, and I am very pleased about where we have progressed to in our organization. Our strategy has remained consistent and we remain focused on the three strategic objectives, which are the drivers of growth in our business. First, the growth and expansion of our IGI generic topical product portfolio; second, the growth and acceleration of our pipeline of these generic topical products, and third, the growth of our contract manufacturing and formulation services business. I want to update you in turn on each of these three strategic objectives. Let’s start with our IGI generic products. A total of $1.4 million of our second quarter revenue was generated from the sale of our own generic pharmaceutical products, which brings our total year-to-date to $2.8 million of revenue generated from these products. We have contracts in place now with the major wholesalers and major retailers, we made strong progress in market penetration for each of our first three products, and we continue to expand our customer base, and ready our existing customers for the expansion of the IGI generic portfolio. We’ve truly built the commercial front-end of a pharmaceutical company in a very short period of time and it’s functioning very well indeed. That brings us to the second phase of our strategy, the pipeline. We understand that the driver of value for this organization is built on the expansion of our IGI label portfolio and the consistent growth and acceleration of our possible of our pipeline of new products. Well, we continue to seek business development opportunities, at the same time, our internal research and development team remains focused on the fulfillment of our commitment to submit at least six Abbreviated New Drug Applications or ANDAs this year alone, the most ever submitted by IGI. Our head of R&D has now been with us for just over six months and we continue to make progress on that development front. Hopefully, you saw our press release yesterday, where we announced our third ANDA filing this year, which as I’ve said brings our current total applications pending with the FDA to 11. Based on IMS data for November 2012, we believe the addressable market for these products totals around $250 million. In addition to these applications, we currently have 14 projects under active development today that will soon facilitate further submissions and we are investing in the expansion of our internal R&D resources at IGI in order to accelerate the expansion of that organic pipeline. At the same time, look I know that we’re all looking forward to IGI’s first ANDA approval, while average ANDA review time with the FDA continued to grow, rest assured, that the FDA is actively reviewing certain of our files and interacting with our regulatory and R&D teams here at IGI, and we are making progress. I can’t predict exactly when this will result in approvals, but what I can say is that we do see forward momentum on our applications. In addition to this, our team did a tremendous job this quarter to execute a seamless transition for the acquisition of the econazole nitrate cream 1%, which we purchased in February of 2013. We’re confident that we will obtain the necessary approvals to begin manufacturing this product at our facility this summer and anticipate a product launch date in August. Our sales team has been actively managing this transition. This product has an addressable market, again, based on IMS data, of around $12 million. With the success of this first product acquisition behind us, we’ll continue to search for products, applications or intellectual property that we can acquire and consolidate into IGI. Finally, let me talk a little bit about our contract manufacturing and formulation services. We grew our contract manufacturing business 30% thus far in 2013 compared to 2012. We’ve grown our revenue from this business to $4.4 million this year as compared to $3.4 million in 2012. Revenue from our pharmaceutical customers year-to-date in 2013 represented 54% of our contract services revenue compared to 46% in the first six months of 2012. Remember our contract services business has not only the capabilities to execute turnkey manufacturing of a wide range of topical products, but we also offer our customers a suite of development services from site transfers in existing product to the formulation of new products up to and including the filing of ANDA submissions to the FDA on their behalf. With all of this top line growth, we’ve improved our margins from 28% to 30% year-over-year. This was attributable not only to the launch of our IGI label products, but also result of our continued successful efforts to shift our product mix to include more pharmaceutical customers. As you may recall, we had executed a new contract manufacturing relationship with the minimum commitments that will make use of our existing formulation and our proprietary Novasome technology. This contract includes a $3 million commitment over the coming three years, generally, a greater margin than our typical contract services customer, as these products are based on our own intellectual property. As we anticipated, we shipped products under this contract already in the second quarter of this year. Our growth strategy has three distinct initiatives, but the foundation to all of these remains the same and that’s our dedication to quality. We will continue to invest in this area of our business to ensure that the foundation of our growth remains as strong as ever. We are now halfway through 2013, and as expected, 2013 will be a feasible year for IGI. We remain committed to our target to double our 2012 revenue and achieve profitability in 2013, and we’ve made some considerable progress so far this year. Let me now turn this presentation over to Jenniffer Collins, our CFO, and she can give us some more detailed discussion of this second quarter financials.

[Jenniffer Collins:]

Thanks, Jason. Good afternoon, everyone, and again, thanks for joining us today. Total revenue for the second quarter of 2013 was $3.8 million, an increase of 57% over the same quarter last year. This increase of $1.4 million was attributed to $1.4 million of revenue generated from our first three IGI label products that we launched earlier this year. $500,000 of additional revenue generated from our contract manufacturing services, which was offset by a decline in revenues from our formulation services business of about $500,000. Our IGI product portfolio includes three authorized generic products and as customary in the pharmaceutical industry, our gross product sales are subject to a variety of deductions, which lead to the $1.4 million of our reported net IGI product sales. When we recorded gross revenue from the sale of our IGI products, we make estimates of various allowances which reduced product sales. These include estimates for chargebacks, rebates, cash discounts and returns, and other allowances. We didn’t make any significant adjustments to these estimates for these deductions in the first quarter of 2013, but we will continue to monitor our estimates closely as the actual charges are presented. As I mentioned, we grew our contract services business by $500,000 as compared to the second quarter of 2012. As you may recall during the first quarter of 2013, one of our pharmaceutical customers accounted for a significant portion of our revenue, primarily due to the fact that the first quarter of 2013 was the first full quarter of shipments to this customer. As our contract manufacturing business is unique to order business, there may be variability in the percentage of our contract services revenue resulting from the sale of pharmaceutical products quarter-to-quarter. However, year-over-year, we expect more of our contract business to result from the sales to pharmaceutical customers. Due to the tinier purchase orders, contract manufacturing and formulation services revenue from our pharmaceutical customers represented 44% of Q2 revenue as compared to 45% in Q2 of last year. Sales of OTC products was 9% in Q2 of this year, as compared to 1% in the second quarter of 2012, and our cosmetic product sales represented 48% of revenue in this quarter as compared to 54% in the same period last year. Year-to-date, 54% of our contract services revenue resulted from the sale of pharmaceutical products as compared to 46% in the first six months of 2012. As I said earlier, compared to the same quarter last year however, the increase in revenue from our contract manufacturing services was offset by the decrease of $500,000 in our contract formulation services business. You may remember in 2012, we received significant revenue from the site transfer of one of our pharmaceutical partners that I referred to earlier, which resulted in contract manufacturing sales to our customer beginning in the fourth quarter of 2012. Typically, margins for our contract formulation services business are higher, and as such, even though we experienced a $1.4 million increase in total revenue as compared to the same quarter last year, our margins were relatively flat. Our gross profit was 30% in the second quarter of 2013, compared to 30.9% in the same period last year. For the first six months of 2013, we saw an increase in gross profit to 30.1%, as compared to 28.5% for the same period last year. This was due to the increased revenue from our pharmaceutical partners as well as the launch of our own products, which improved gross profit, which more than offset the decline in revenue from our contract formulation services business. With a significant growth in revenue, SG&A as a percentage of sales for the three months ended June 30, 2013, as compared to last year was only 18%, compared to 35%. 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, approach profitability, we expect to make some additional investments in sales and marketing in order to successfully place those products with national, regional and local retail. Our successful management of SG&A costs will help us to continue to invest in R&D. To that end, we spent $800,000 in the second quarter of 2013, as compared to $600,000 in the same period last year. Our investment in R&D included fees related to one ANDA filing in the second quarter in accordance with the fee structure from PDUFA, the addition of our SVP of R&D in December of 2012, and some required outside testing needed to complete the submission of the remaining three NDAs we have committed to file this year. In order to continue to expand the pipeline and continue to drive shareholder value, we expect to continue to increase our R&D costs as we focus on expanding the development of our portfolio of generic topical pharmaceutical products, adding to the 11 submissions we have on file with the U.S. FDA. Net loss for the second quarter was $0.01 per share as compared to $0.01 per share in the same quarter last year. Our net loss of approximately $403,000 included $805,000 of R&D spending in the first quarter – in this quarter. The increase in net loss was compared to the first quarter of 2013 of $146,000 was primarily attributable to the increase in R&D spending as compared to Q1. Probably the second time, since we filed our first ANDA, our operations for the quarter generated cash. We generated $643,000 in cash, which is after the $800,000 we spent on R&D. As you’ll recall, with the launch of our IGI label products, we did make a significant investment in accounts receivable in the first three months of 2013, and we were able to successfully collect on the initial orders for our IGI label products, which has improved our cash position. Year-to-date, we’ve used $950,000 of cash in our operations, which includes spending $1.5 million on R&D this year. While we do expect our investment in IGI label accounts receivable to continue over the next few months, as our customer relationships mature, we expect that this investment will result in reaching profitability in 2013 as projected. We’ll continue to invest in R&D, manage our operating resources and increase our sales effort in order to ensure that we meet that goal. We are intently focused on the day-to-day management of cash. Jason and I are committed to achieve profitability by utilizing our existing resources and managing our spending over the next two quarters to ensure we meet our expectations. Reaching profitability is a very important milestone for us at IGI and it will enable us to continue to reinvest in our future and allow us the opportunity to explore additional opportunities to accelerate growth. For the second quarter of 2013, cash used in investing was $89,000 for some minor capital expenditures. Year-to-date in 2013, our cash used in investing was about $1.6 million, which includes the $1.1 million we paid to Prasco for the purchase of econazole nitrate cream 1%. As contracted, we paid them an additional $400,000 upon completion of the transfer of manufacturing in July of this year. Our cash and financing activities totaled $1.3 million for the year, which included $1 million of funds we drew from our credit lines during the first three months of this year. Things have been progressing well on our investor communication front. We presented at the 12th Annual Healthcare Conference at Needham & Company in New York on April 30. We’re finalizing our project to upgrade our website, to incorporate the new vision of our business and make it easier for investors to find the information regarding us. We are actively talking with investors and potential investors and hope to add additional conference appearances to our list for the remainder of the year. Jason and I are committed to meeting with investors and potential investors to improve communication and we’re always available to our investors, so don’t hesitate to reach out. Jason and I are 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, Jen. Before we open this up for questions, I want to underline a couple of things in the business and financial review. First, as Jen said, we remain committed to the goal of at least doubling our revenue and achieving profitability in 2013. Today’s results are consistent with our plans and expectations with respect to that goal. Second, R&D expenses were at their highest anticipated level of the year during the second quarter as result of outside testing and external fees related to our ANDA pipeline. These are expected to moderate for the remainder of 2013. Third, with the launch of the econazole product next month, we will have four IGI labeled products in the market contributing to our top line revenue. And finally, as a result of our current performance and based on our existing lines of credit, we do not anticipate raising any equity in 2013 to fund operations. I believe, I’ve told you before that it’s my conviction that we must bring this company to profitability and to be self funding and I remain committed to that. Our business is moving forward, and our team continues to execute on this very focused strategy, as ever, I’m grateful for your support. and at this point, Carla, we’re happy to take questions. Thank you.

[Operator:]

(Operator Instructions) Our first question comes from the line of Alan Troy. Please proceed.

[Unidentified Analyst:]

Hi, Jason and Jenniffer. I’m very pleased with the direction IGI is going, and I’m hoping for approval for the first ANDA. My question is once that’s approved, does it make it easier for the future ANDAs to be approved in a more timely manner?

[Jason Grenfell-Gardner:]

Hi Alan, it’s great to hear from you, and thanks for that question, it’s a really great question. I think as the company has gone down this ANDA submission pathway. as there’s anything, I think one gets better at it. And I would say that the first filings that we’ve had were doubtless of learning experience for the team as we went through that. and of course, that makes a review process perhaps slightly longer. In addition, some of the early applications were applications that were submitted in paper format as opposed to being submitted in an electronic format. Since December last year, I believe we have filed all of our applications electronically that obviously makes review and feedback and comment from the FDA easier and it makes it easier for the agency to manage the actual application. So I think that the answer to your question is yes, it should become easier, but I think it becomes easier, because the files will be doubtless more robust than the files have also been submitted electronically in recent times.

[Unidentified Analyst:]

All right, that should be helpful. and hopefully it improved the timeframe. The road shows that you’ve done have been very successful as far as the price of the stock and attracting investors. So I would hope that you guys would be continuing on that path, and then do as many road shows as you can.

[Jason Grenfell-Gardner:]

We agree with you, and Jen and I continue to talk to people to find those opportunities to tell people about the IGI story. again, it’s a great story and it’s a great space that we’re very unique, company unique asset in this space. But more people need to hear about IGI and we remain committed to that.

[Unidentified Analyst:]

Okay. Thank you, good luck.

[Jason Grenfell-Gardner:]

Thank you. Our next question comes from the line of Dr. Lionel Resnick, please proceed.

[Unidentified Analyst:]

Yes, thank you for the interesting conference call. What are the three products that you currently now have that are being distributed and so besides the one that you just mentioned that is number four?

[Jason Grenfell-Gardner:]

Hi Dr. Resnick, thanks for your questions. So today, we actually market three products

[Unidentified Analyst:]

Thank you.

[Jason Grenfell-Gardner:]

You’re welcome.

[Operator:]

(Operator Instructions) Our next question comes from the line of Scott Henry with ROTH Capital. Please proceed.

[Scott R. Henry:]

Thank you and good afternoon. Jason, just a couple of questions, first on the IGI generic label product, it was flat sequentially from first quarter to second quarter. Would you expect to start to see a ramp now, I imagine there was some stocking in the first quarter that leveled out, but should we start to see a true run rate development in the second half of 2013.

[Jason Grenfell-Gardner:]

Yeah, I think that’s right, Scott, and it’s great to hear from you, and thanks for joining us. As you know, as you get these products and you start launching them, there are some transitions and some bumps in inventory levels that you’re moving around the system. So I think that definitely, as we start to move into the third and fourth quarter, you will see some incremental growth in that, just as it all settles in, so yes.

[Scott R. Henry:]

Okay. and then on the econazole nitrate cream, I guess how we’ll be booking the revenues there; I mean should we expect I guess some small orders in the third quarter and then that started to have pronounced a trajectory or will it be a lag there, I just want to get an idea at their reported revenues?

[Jason Grenfell-Gardner:]

Yeah, sure. so I think our expectation is that we will launch this product somewhere in the early part of August. We have built inventory to that end, and we’re just going through the process with the FDA to authorize that site transfer. Once that’s clear and we’re comfortable with that, our sales and marketing team has been actively working on transitioning the existing customers into the IGI product. so I expect just again as inventory levels are working out and we’re tailing off from the previous Prasco product into the IGI label product that could be some bumps in August, but as we get into September and October and moving forward, I would expect that to be fairly consistent and fairly reasonable run rate. So right now, I think it’s just going to be a bit of an August launch issue, and then we should be good moving forward.

[Scott R. Henry:]

Okay. in the final question, you did mention obviously, generics at the FDA is hard to have any visibility, but you mentioned that you are seeing some forward momentum on applications, I guess I would interpret that is if you are having continued interaction with the FDA, I guess the question is that the correct way to interpret it and I guess more so, although you don’t have a crystal ball, would you be surprised if you didn’t hear back on any application by the end of 2013, just trying to handicap how you think of it?

[Jason Grenfell-Gardner:]

Sure. On the first part of your question there, I think you’re reading that right for others who are listening out of this call may be less familiar with that process. After we submit an ANDA to the FDA, there is often a fairly lengthy period of time, when we hear relatively little of anything from the agency, before it moves into active review. Once a file moves into active review of course, we begin to get feedback from the agency and answer questions and inquiries about elements of our equivalence, elements of chemistry and manufacturing process and elements of our labeling. With respect to the files that we have at the agency already, there are certain files that we are in regular communication with the FDA, which means that they’re under active review and consideration. In terms of whether I would be surprised or not about whether this gets approved in 2013 or not. it’s really, it’s got so difficult to say, I think there has definitely been again a slowdown as the agency, whether that’s because of the required resources to implement PDUFA or the impact of sequestration and sequestration even as it if relates to PDUFA fees. I know the agency is definitely struggling with the volume of workload and churning these things around. So I wouldn’t be surprised, but I continue to be hopeful that we will successfully progress these things across the finish line. I just can’t speak exactly the time.

[Scott R. Henry:]

Okay, great. Thank you for taking the question.

[Jason Grenfell-Gardner:]

Sure.

[Operator:]

(Operator Instructions) our next question comes from the line of (inaudible). Please proceed.

[Unidentified Analyst:]

Hi, Jason. It’s (inaudible). I just wanted to have a couple of quick questions, if I may, and the one is in terms of getting profitability this year, can you give us some color on is that going to be third quarter or is it all going to be in the fourth quarter, and ideally kind of what is a range kind of net profit for the year? And the second question will be pretty much the same question for 2014, I mean, there were a lot of things in the pipeline, a lot of opportunities there, can you give us kind of a range of how you think about next year where next year might end up, and maybe the two most helpful metrics there would be revenues from $200 million and kind of net profit ideally. again, just a broad range, so we have just an idea of what might happen?

[Jason Grenfell-Gardner:]

Sure. So first Robert, thank you for joining us, it’s great to hear you. With respect to your first question about the profitability for 2013, what I would say is that I see the transitions; turning point as being one of kind of first reducing the losses that we have seen in the past. So we’ve definitely seen a reduction in the loss rate over the past two quarters, I think then as we move into the third quarter, we’re going to get to more of a stabilization point. And then into the fourth quarter with normal run rates of our first three products, with a normal run rate of our econazole product and anticipated launch of our fourth AG product, we really kind of see a turn in the quarter. And some of that also is a reflection of the makeup of the contract manufacturing revenue, and as Jenniffer mentioned in her statements as well, the increasing percentage of pharmaceutical customers and the associated margins that result from that. If I look at the full year, what we’ve said is our goal is to achieve that profitability. I would say that more of that is going to be in the fourth quarter. I don’t think that is going to be, listen, I don’t expect a home run for 2013, but we will get to profitability. And then we will continue to build on that in 2014. With respect to your second question on how I look at 2014, I think we’re at this point of trying to understand, how we’re going to face our anticipated approvals and new launches with respect to 2014. and currently, as a management team, we’re just beginning our process of putting together our estimates and forecasts with respect to our budgets for 2014. It’s a bit fluid, right, because again, some of this is dependent on how the underlying contract manufacturing portfolio is developing and some of this is down to how we handicapped that approval timeline and the responses that we’re getting with the agency. I think it’s a little bit early for us at this point to give any concrete guidance on that. But I suspect as we get into the third quarter conference call, we will be able to give you some better visibility. So bear with me on that if you could, but I think we’ll continue this forward momentum that we’ve seen this year.

[Unidentified Analyst:]

Thanks for taking the questions.

[Jason Grenfell-Gardner:]

Sure.

[Operator:]

We have no questions in the queue at this time. (Operator Instructions) Okay, we have no questions in the queue.

[Jason Grenfell-Gardner:]

All right. Well, Carla, thank you so much for your help. And again, thank you everyone for joining us for this quarterly update. We look forward to talking to you again in a few weeks to update you on our Q3 progress. And we thank you again for your support. Thank you and have a great evening.

[Operator:]

And ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.