Teligent, Inc.
Q3 2014 Earnings Call Transcript

Published: 24 Oct 2014

[Operator:]

Hello, and welcome to the IGI Laboratories Third Quarter 2014 Financial Results Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today’s presentation there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded. And now for the Safe-Harbor statement, except for historic facts, the statements in this presentation as well as oral statements or other 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 and 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, FDA, 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 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. And now, I would like to turn the conference over to Jason Grenfell-Gardner, President and CEO. Please go ahead, sir.

[Jason Grenfell-Gardner:]

Thank you, Denise, and good afternoon, ladies and gentlemen. Welcome to this IGI Laboratories business update covering the third 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. Today, I’d like to give you an update on the continuing transformation of our business and our business strategy, and also provide you an update on our current business performance. Then, Jennifer will review our financial results for the third quarter, and finally, I will discuss our progress and our key goals for 2014. Many of you remember that I’ve talked about 2014 as a year of transformation at IGI, after our year of transition in 2013. This transformation is not only well underway, but it’s picking up speed as we roll out the next elements of our corporate strategy. All this is underpinned by significant achievements, both organizationally and economically in our core business. Today, I would like to share with you how our business model is going to evolve over the coming months. It’s a pretty exciting time here and I think you’ll like where we’re headed together. Let me start by saying that at IGI, we take a very pragmatic and focused approach to our business and that focus is strictly on the execution of our business plan and strategy. In 2012, as part of that execution, we launched the first IGI-label topical generic products, and in 2013, we continued our plan by accelerating our product launches and making our first product acquisition. All of this we did while conservatively managing our cash, expenses, and continuing to invest in our pipeline. Today, we’ve laid the foundation and begun delivering on the vision that we set forth to create a leading player in the topical generic market. But as that engine started running, we also knew that there were significant opportunities to accelerate value growth for our business through finding ways to leverage different parts of our value chain. At the end of June, having identified a number of market opportunities for further growth in line with this strategy, we raised just over $25 million in the equity market, solidifying our balance sheet and providing us with a broader capability to grow our business. With this capability, we have now been able to lay out our broader strategy for specialty generics, a strategy that we, here at IGI, call by the acronym, TICO, T-I-C-O, which stands for topical, injectable, complex, and ophthalmic. These four areas that make up TICO are the areas where we, at IGI, plan to concentrate over the coming years, as we continue to build and grow our business. But before I get too ahead myself, let me go back and explain how TICO came to be here at IGI. The first part of the TICO strategy is actually the T for topicals, and this is our core business here at IGI today. We’ve now built the core of our topical capabilities from R&D through commercialization. We’ve filed 19 ANDAs at FDA for the IGI label, of which two have been approved, leaving a net 17 ANDAs pending approval with a total addressable market of approximately $465 million based on recent IMS data in generic sales. In addition, we filed four ANDAs together with marketing partners. Our pace of R&D has increased significantly over the past three years. In the first nine months of this year, we filed six ANDAs for IGI and one as part of a partnership arrangement with Impacts Laboratories. In this fourth quarter, we anticipate filing a further four to five ANDAs, which is in line with our stated goals for this year. But more importantly, we’ve built that R&D engine that will deliver one to two ANDA filings per month in 2015 accelerating throughout that year. Based on this capability, we’ve identified around 45 projects that, taken together with our existing pipeline, will see IGI filing all HE-rated products that is all topical solutions and some older legacy topical products and all AB-rated corticosteroids with market potential. These 45 incremental projects are at the core of our ANDA filing pipeline between today and the end of the third quarter of 2016. We estimate these filings will add a further $1.3 billion in total addressable market based on recent IMS data. As these ANDAs get approved, we anticipate that IGI will have one of the broadest and most complete lines of these target product areas in the industry. In addition to this core pipeline, our R&D team has started their work on the first projects that will require us to undertake clinical endpoint studies to demonstrate bioequivalence. These products are largely products for indications that include acne, rosacea, anti-fungals, actinic keratosis and so on. The products tend not only to be more complex, but also more expensive due to the clinical requirements. We anticipate that the first of these filings will be ready to be submitted by the end of 2016. So you can probably hear our topical strategies clear and is running. I’ll talk a bit more about the financials behind this in a moment. But the strong fundamental performance of this business and the growth of our capabilities are core to what allows us to look at the other components of our strategy in TICO, the injectable, complex and ophthalmic projects that will enable us to build a broader-based partner in the specialty generic space. So, people ask us why we’re looking at these adjacent spaces. So, let me answer that question. If you think about what it takes for IGI to bring a topical generic product to market through organic development, it involves a number of different capabilities. These include product selection, raw material sourcing, drug development, regulatory affairs, patent and legal skills, manufacturing and logistics, and sales and marketing, in addition to the core skills of quality management, finance, HR and IT. These skills when applied for the topical generic market are also largely applicable to the other segments of the generic market pivoting around that manufacturing technology. Having built strong capabilities across the series of economic activities, our real question is how do we best apply these skills to build and drive growth? And we believe that our TICO strategy delivers just that. So, let me talk a little bit about what we’re doing in the non-topical market. I is for injectables. Over the past five years, the U.S. injectable market has suffered from repeated shortages and failures in supply chain caused by a combination of regulatory actions, product discontinuations, and simple market failure. Indeed today there are 67 injectable products in drug shortage according to the FDA, and even more if you look at the data available from The American Society of Health Systems Professionals, or ASHP. There has been a general perception that this market would somehow fix itself, and yet that hasn’t happened. Rather, it seems to us that this market continues to struggle with significant supply challenges. With that being said, this is still an $8.1 billion generic market and an $87 billion branded market. Recent IMS data for August 2014 indicated that of this $87 billion, $4.8 billion faces a loss of market exclusivity or is going off patent between now and the end of 2017, and logically a number of companies in the injectable space are spending significant amounts of time working on those projects. That’s not our focus here. We believe that by building a robust supply chain, leveraging our existing capabilities, we can begin to chip away at the fragile supplies of drug shortage products and position IGI as a go-to supplier for the day-to-day workhorses of hospital pharmacy. The first step of this was our acquisition of the 17 injectable products from AstraZeneca in September. Of these 17 products, nine are on the FDA drug shortage list. We are hopeful that the FDA will partner with us to bring some of these products back to market expeditiously. But even as a first step, we anticipate having the first products back to market by the end of 2015. Our Vice President, Business Development, Thomas Vandervort, is actively working with our team to finalize our manufacturing strategy for these products. Unlike some players in this market, we believe that eventually owning our own manufacturing and the quality systems that support it are key to ensuring the quality of the products that we sell. We anticipate making a determination about whether we will acquire an existing facility or build our own by the end of this year. Let me talk about the next part of the strategy, C for complex. This is probably the broadest part of our specialty strategy. Today, we’re focused, first, on work that we’ve begun for products using the 505(b)(2) pathway which would lead to NDAs for the drugs that we file. The first two projects that we’re evaluating are projects that seek to gain approval for drugs that are currently marketed in the United States without formal FDA approval. Successfully gaining approval for these products would likely result in three years of market exclusivity for IGI. These are in early stages, but I anticipate that we will be able to provide you more clarity of the timelines when these projects evolve. Finally, let me touch on O for ophthalmic. We see a number of similarities between the ophthalmic market today and the way the topical market was four, five years ago. The market is highly concentrated with $1.2 billion in generic sales based on IMS data for August 2014, of which, 83% is concentrated in the top four players. Ophthalmic drugs can often make use of the same sterile block manufacturing as we use for injectable drugs. As such, the two products that we acquired from Valeant at the end of September, we anticipate will help us with operating leverage in manufacturing while providing optionality on pricing as a result of the existing market concentrations. So that’s TICO; topical, injectables, complex and ophthalmic, the four pillars that we believe provide the support for the next stage of the IGI business transformation. Now, in order to carry out this strategy, it helps to have a strong foundation. Let me touch on some of the highlights of the quarter before turning over to Jennifer for the full financials. Year-to-date in 2014, we recognized $9.3 million in sales of IGI label products, that’s an increase of 123% over the same period last year. This growth has been driven partially through the annualization of sales for products launched through the period as well as from some significant price increases for core products in the portfolio. As we look to the fourth quarter, we anticipate these price changes to be more fully reflected in our financials. In addition to the IGI label business, I’m pleased to report that our strategic transition in our contract services business has continued to follow our plan. Revenues year-to-date for contract services are up 46% compared to 2013 for total sales of $10.7 million. Perhaps as important as this increase is the fundamental change in the composition of the customer base in our contract business is also important. In the third quarter of 2014, 85% of our customers came from pharmaceutical customers compared to 62% for the same period in 2013. And year-to-date 2014, 79% of our customers were pharmaceutical customers compared to 57% for the same period in 2015. As you’ll recall from our previous discussions, the goal is to drive more of our business towards our pharmaceutical customers, which tend to provide us with higher margins, greater order pattern predictability and a better fit for an FDA regulated facility. Taken together, our revenue growth, margin improvement, and R&D productivity have but us on track to meet or exceed all the goals that we’ve set out for 2014. As a reminder, our three core goals for the year included; first, revenue growth of 40% to 45% over 2013 for the full year with gross margins of 40%; second, increased R&D productivity with a commitment to file at least 10 ANDAs with the FDA; and third, maintaining profitability for the full year in 2014 while doubling our R&D spend to drive filings. Given the current run rate of our business, we now expect that revenue will grow 74% to 84% over 2013 for total target sales of $31.5 million to $33 million for the year with gross margins for the full year of approximately 50%. We continue to be on track to meet our R&D productivity commitments to file at least 10 ANDAs. Finally, we now believe that net income for the full year will be between $2 million and $3 million. With that update, let me turn the call over to Jennifer to continue the financial review of the quarter.

[Jennifer Collins:]

Thanks Jason. Good afternoon, everyone, and again thanks for joining us today. Our total revenue for the third quarter of 2014 was $6.7 million, an increase of 67% over the same quarter last year. Revenue for the third quarter of 2014 included $3 million of net revenue from the sale of our own IGI label products, compared to just $1.4 million in the same period last year. We increased revenue $2.7 million over the same quarter last year. This increase was attributed to $1.6 million of additional revenue generated from our IGI label products and $1 million of additional revenue generated from our contract manufacturing and formulation services. Our IGI product portfolio included revenue from our four authorized generic topical prescription products, our first organically developed and approved product, lidocaine topical solution and our first proprietary product, econazole nitrate cream. As is customary in the generic pharmaceutical industry, our growth product sales are subject to a variety of reductions which include estimates for chargebacks, rebates, cash discounts and returns and other allowances. As you may have seen in our earnings release issued earlier today, our net revenue from IGI label products in the third quarter included an adjustment to account for the increase in chargebacks owed to our wholesale customers. In September, we increased weighted average costs and contract prices for all three skews of our econazole nitrate cream products. And as is customary in the generics industry, our contracts with the wholesale customers include obligations for IGI to adjust for chargebacks for all the inventory that is on hand and on order. Our customer contracts also often include price protection clauses which give our customers price protection for a certain period of time. These adjustments decreased net revenue approximately $3.8 million in the third quarter. As I mentioned earlier, we grew our contract services business by $1 million as compared to the third quarter last year. Our contract manufacturing revenue in the third quarter was $400,000 more than last year and it was primarily attributable to two pharmaceutical customers. Our increased contract formulation revenue in the third quarter was $6,000 higher than last year primarily attributable to the completion of certain milestones in the third quarter of ‘14 in accordance with our formulation agreement with one of our pharmaceutical partners. Contract manufacturing and formulation services revenue from our pharmaceutical customers represented 85% of our third quarter revenue, compared to 62% last year. OTC sales were 0% in the third quarter of this year, compared to 5% last year, and our cosmetic product sales represented 15% of revenue in this quarter as compared to 33% last year. As you may recall, this is still a make-to-order business. So, there may be some variability in the percentages of our contract services revenue, resulting from the sale of our pharmaceutical products quarter-over-quarter. However, year-over-year, we expect more of our contract business to result from the sales to pharmaceutical customers. Our gross margins in this quarter were 40%. Our significant revenue growth and favorable product mix in contract services enabled us to improve gross margin revenues. But these improvements were offset by the $3.8 million chargeback increase I discussed earlier. As Jason mentioned, we now expect margins for the full year of 2014 to approximate 50%, a significant improvement over the gross margin in 2013 of 34%. Year-to-date our gross margin was 42% in 2014 compared to 31% last year. These improvements are attributable not only to our revenue growth and product mix shift, but to increases in efficiencies in our operations and our ability to better leverage our operations as we continue to increase throughput at our facility. As we’ve successfully continued 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 third quarter was 17%. That’s consistent with the same quarter last year. SG&A in the third quarter of 2014 was consistent in absolute dollars with the second quarter of this year, and both quarters included costs related to increased professional fees, non-cash expenses related to stock-based compensation, and the expenses related to performance-based pay for 2014, which were higher than last year. We do plan to continue to manage our administrative costs while expanding our customer base and product portfolio, but we do expect some additional investments in SG&A over time to support our growth. Our strong performance on all fronts during the third quarter of this year allowed us to continue to invest in R&D. We spent $1.7 million in the third quarter as compared to $700,000 last year. In order to continue to expand our pipeline and drive shareholder value, we expect to continue to more than double our R&D spend in 2014 as compared to last year, as we focus on expanding our portfolio of generic topical pharmaceutical products, adding to the 17 submissions we have pending at the FDA. We plan to expand our R&D team, and as Jason mentioned, we plan to file at least another four ANDAs by the end of the year. We will continue to increase R&D cost, but we plan to manage that growth to be consistent with our strategic plan. In the third quarter of 2014, IGI recorded a net loss of $202,000. Year-to-date, our net loss was $380,000. As Jason discussed earlier, fiscal responsibility is critical to our success, and as a result of our recent product price increases, we have indicated we plan to deliver net income between $2 million and $3 million for the full year. Year-to-date in 2014, our net cash used in operations was $1 million and included $5 million of R&D expenses. In the same period last year, we used $1.4 million. Maintaining profitability in 2014 is important to us. It was merely the timing of our R&D investments and increase in our charge-back reserve we discussed earlier on a quarterly basis which contributed to this small net loss we had year-to-date. IGI now can demonstrate that our own operations will generate cash and enable us to continue to reinvest in our future and allow us to explore additional opportunities to accelerate growth. Year-to-date in 2014, cash used in investing activities was $3.1 million. This includes our initial payment for the AstraZeneca assets we purchased in September as well as an additional $1.5 million we paid for Valeant for the two ophthalmic products. In connection with the AstraZeneca transaction, we will be required to pay an additional $6 million up on our first regulatory filings in 2015. In connection to the Valeant transaction, IGI has the exclusive right to purchase three injectable products from Valeant for an additional $2 million. On July 2 of this year, we closed our underwritten public offering of shares of our common stock. After giving effect to the exercise of the overall allotment option, we sold an aggregate of 5.3 million shares of common stock at an offering price of $5 a share. The net proceeds of this offering were $25.2 million after deducting underwritten discounts and commissions in other operating expenses. So after those acquisitions, of that $25.2 million we raised in July, we’ve already committed approximately $10 million for the acquisition of 20 products in the injectable and ophthalmic markets. We think it’s really important to put back money to work for IGI as quickly as prudently possible. Our business development team continues to hunt for additional products and opportunities that fit within our FICO strategy Jason talked about. Year-to-date in 2014, our cash from our financing activities was $25.3 million, which included the $25.2 million we raised in July, in addition to funds received for the exercise of warrants and options. We also have access to an additional $2 million under our existing working capital lines. We’re in the final stages of evaluating some options to restructure our existing lines, and we should have that finalized in the fourth quarter. Jason and I met with many new and existing investors at our meetings during the offering process as well as some non-deal road show meetings in September and early October. We will be adding additional conference appearances in December 2014 at the Piper Jaffray and Oppenheimer conferences. Just this past August, Rohit Vanjani, from Oppenheimer initiated research coverage for IGI. So now IGI has three research analysts which provide a third-party view of our business and our future. If you think back just a year ago, IGI didn’t had any research coverage. Jason and I have committed to continuously improving our communication with our investors and potential investors and we really do understand the importance of transparency with the investment community. In closing, earlier this month, we announced Steven Koehler has joined our Board of Directors. Steve has been appointed the Chairman of our Audit Committee and he will serve [indiscernible] on that committee. Steve retired from Merck in September of 2011. He has held executive and senior roles at Schering-Plough, The Medicines Company, Vion Pharmaceuticals, Knoll pharmaceuticals, Boots Pharmaceuticals and American Hospital Supply Corporation and then Baxter International after their merger. We’re excited to work with Steve and look forward to learning from his experiences as we continue to grow here at IGI. Thank you all again for joining us today. Jason and I are truly grateful for your participation and look forward to updating you soon. I will now turn the call back to Jason for his closing remarks.

[Jason Grenfell-Gardner:]

Thanks, Jennifer. We believe that IGI has delivered great execution on our strategy to-date, and with this TICO strategy to guide us over the coming years, we’re in a great position to be able to deliver a broad-based specialty generic pharmaceutical company. There is no doubt that we have a lot of work to do, but this team is committed to excellence, governed by quality and focused on execution. As ever, I’m grateful for your support and for this opportunity to serve IGI shareholders. At this point, Denise, we're happy to take questions. Thank you.

[Operator:]

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question will come from Matt Hewitt of Craig-Hallum Capital Group. Please go ahead.

[Matt Hewitt:]

Congratulations on the good quarter and all the progress you’ve made so far this year.

[Jason Grenfell-Gardner:]

Thanks, Matt. It’s great talking to you.

[Jennifer Collins:]

Thanks, Matt.

[Matt Hewitt:]

First question from me, obviously substantial price increase mid-quarter and I just want to make sure I’m understanding this correctly, so the $3.8 million of reserve, should we expect a large portion of that to come back on here in the fourth quarter or will there be maybe an extra half quarter lag into Q1?

[Jennifer Collins:]

Thanks for your questions, Matt. That reserve was taken in September, and then we would expect that kind of covers us for all the price protection and chargeback adjustments we need to make. So once we get into recording October revenues, you won’t see any of that adjustment in the future.

[Matt Hewitt:]

Okay. So you should get the full benefit of that price increase starting here in the fourth quarter. There wasn’t any, I guess, contract provisions that would extend that – the prior price into Q1?

[Jennifer Collins:]

No. We accounted for all of that at the end of the third quarter. So you won’t see that going into the fourth. It will get back to what we think would be a normalized run rate for those products.

[Matt Hewitt:]

Fair enough. Secondly, regarding the FDA, have you had any update, any complete response letters, anything along those lines?

[Jason Grenfell-Gardner:]

It’s interesting I was reading today some of the emails, as everyone, we received from the Center of Drug Evaluation and Research with updates on their latest activities. I was thinking to myself when the last time was that I actually saw any of them that involve the Office of Generic Drugs. I hope they’re still there. It’s really – it’s quite remarkable. We have received some correspondence from the FDA on a couple of files that we have. This continues to be really a painfully slow and tortured process. We do our best to continue to respond to any inquiries that we get on a timely basis. Moving forward with this being the third year for PDUFA from October 1 and a new standard in place, we’re somewhat hopeful that we may see a change in the level of communication that we have had up to-date, but we’re still waiting for that to happen.

[Matt Hewitt:]

All right. Maybe one from me and then I’ll hop back into queue. Regarding the products that you’ve acquired, I think you gave a really good update and provided some thoughts on the timing. I guess looking out little bit farther, you even touched on this a little bit, but eventually you’re going to want to bring those capabilities in-house. I would assume that you’d want to have the site, at least one or more of the site transfers complete first before you acquire the facility or would you – are they separate issues?

[Jason Grenfell-Gardner:]

I think that they are somewhat separate issues. So I think there is one question which is what can you do to accelerate the return to market of some of those products more quickly, and there we’re looking at some near-term relationships with some contract manufacturing partners just to be able to get some of those products made back to the FDA back to market. But we’re very upfront with people and we say, look, this might last a year, it might last two years depending on the time that it takes for us to resolve our own internal manufacturing, but it’s not going to be a long-term relationship because we very firmly believe that controlling the manufacturing and the quality behind that manufacturing, particularly for injectable products. So I don’t anticipate in the near term that those CMOs would potentially be acquisition targets, they are a little bit different. There may be some overlaps there, but we’re still evaluating both of those options and we’ll try and make a decision before the end of this quarter.

[Operator:]

The next question will come from Scott Henry of ROTH Capital. Please go ahead.

[Scott Henry:]

Thank you and congratulations on considerable progress. I did have a few questions. I guess, first of all, we’re all trying to get our arms around the revenue and earnings potential given some of the things that are going on with econazole nitrate. When I run the numbers, it looks like econazole nitrate, on an annualized basis, is about a $20 million a year product, is that a reasonable assumption?

[Jason Grenfell-Gardner:]

I think we’re watching a price increase that really started to take place in the third quarter. Even as we were preparing for this call, we are 23 days into the fourth quarter, and it’s a little bit nerve-wracking to have to do that. So what I would say is, look, a lot of this is settling out. We’ve tried to give as good a guidance we can for where we think fourth quarter works out. I think you can kind of pencil around that and figure out at least for the fourth quarter what that run rate looks like based on some of the deltas, but I would hesitate to give a full year run rate on that just until I see some more stability if that makes sense.

[Scott Henry:]

Okay, that’s fair enough. But you do think fourth quarter looks somewhat representative given the way market dynamics are today?

[Jason Grenfell-Gardner:]

I think, right now, we’ve given for fourth quarter, we feel pretty good about just based on the market dynamics, inventories and market positions. So we feel pretty good about that. I will feel better about it on December 31.

[Scott Henry:]

Is there anything new with regards to Taro, are you aware of them raising price yet or those dynamics?

[Jason Grenfell-Gardner:]

I’m not aware of where they are in that cycle at this point.

[Scott Henry:]

Shifting gears then, and the next thing I’ll have to try to figure out is kind of the earnings forecast, can you talk a little bit about what you would expect to spend on R&D and SG&A in 2015?

[Jennifer Collins:]

It’s a little bit early for us to – we’re kind of in the middle of our strategic planning and budgeting process for 2015, and we’re pretty cautious about what our plans are. I think that how we’re looking at it is, is that as we continue to monitor the econazole price increase and how that takes shape and takes hold and then what the rest of the portfolio does, I think that’s really going to solidify some of our R&D choices for 2015 and maybe there are some things that we accelerate that we may have thought we are going to do in 2016 based on the fact that becomes favorable for us. But I hesitate to give you a number for ’15 yet. I know that’s not exactly the answer you want right now, but I think as we get into giving 2015 guidance in the first part of next year, we’ll have a full quarter worth of information on these products and we’ll feel better about doing that. But I can tell you for sure that we will more than likely spend – significant more than we spent this year, and that number is really going to be dependent on what the topline looks like and what we think the approval process will look like. I think eventually this model will get to something in the 5% to 7% range. We are taking about R&D as a percentage of total gross sales. For now, I think that we’re going to – we know that number will be higher, maybe it’s 15%, maybe it’s 18%, I’m not sure what the percent would be yet for 2015. But the theme is we are definitely going to accelerate R&D efforts where we can in 2015.

[Scott Henry:]

With PDUFA going into place, I think the stipulation is, correct me if I’m wrong, 90% of applications turned around within 10 months. Should we expect your new ANDAs that you are filing to have less than a year turnaround? I mean it sounds like wishful thinking but I just wanted to get your thoughts.

[Jason Grenfell-Gardner:]

I think that there are two things there. First, based on my understanding, FDA sort of works up to that standard over a period of time and this being the third cohort year, I don’t think that they are really getting to the 90% level this year. I think it’s a little bit less than that. The second concern obviously is how the agency is going to allocate resources internally given that it has some commitments required for year three, four, and five that are going to draw the resources that would otherwise be used to service the over 3,000 backlog applications that predate October 1. So it’s a little bit of pluses and minuses there. I’m hopeful that with the new – with the cohort year three standards together with the new guidances as well on prior approval supplements, that those will, net-net, be positive for us given where we are in our R&D pipeline and the investments that we are making in our ability to accelerate that pipeline. But there are a lot of unanswered questions at the moment and we’re waiting for some greater action and clarity from FDA that, as an industry, I think would be helpful. I know a number of people are looking forward to the GPhA Fall Technical Conference which is coming up as perhaps a venue in which FDA will begin to communicate its approach to some of these items, but absent that, it’s really just speculation on any of our products to try to understand what’s going to happen.

[Scott Henry:]

Fair enough. So, things would get faster, but we won’t hold anyone to the 10 months, which is probably in line with expectations. I guess just a final question from me, Jason, is when we think about bringing these new products to AstraZeneca and Valeant acquisitions online, are there any kind of catalysts we should be focusing on in the next six months? Any updates we should be looking for?

[Jason Grenfell-Gardner:]

I think over the next six months, there is just a lot of hard work that has to be done. If you kind of take those projects together and there is a sort of series of almost clerical steps that have to happen before you can start to accelerate the activity that sort of bring them to market. So, for example, right now, we’re bringing in all of the various bits and pieces of data and collating and making sure that we have everything where it needs to be and it’s properly structured. And then of course, moving through the process, we are working with the ATI suppliers ensuring that the DMS are up to date, validated and then checking what the analytical methods and impurity profile data look like and so on. There is a lot of front-end work that is being done as we triage those products to make sure that we sequenced them perfectly to get them back to market. So I expect that there is going to be a lot of late nights and hard work going into that without a lot of excitement and news until we finally get those products back to the FDA. So it’s going to take us a little time.

[Operator:]

Our next question will come from Phil McCracken of PMS Advisory. Please go ahead.

[Phil McCracken:]

Jason, Jenifer how are you? Just want to congratulate you guys on a strong quarter and continued progress and we all anticipate a terrific fourth quarter from you guys. So, congratulations again.

[Jason Grenfell-Gardner:]

All right. Thanks, Phil, we appreciate it.

[Operator:]

And the next question will come from Ken Marsh of Marsh Management. Please go ahead.

[Ken Marsh:]

I would like to congratulate you both on what you’ve just recently achieved and also on this conference call, I think it was very communicative and helpful and good looking into the future for our stockholders. I do have a let’s say a broad kind of a question. If we’re coming from a loss so far for this year and you are looking to exit the year with a $2 million to $3 million profit, what are we looking at in ’15? Should we multiply that by four and say hey, we might make $8 million? And is this due to your price increases that have been put in place?

[Jason Grenfell-Gardner:]

So that’s a great question, Ken. Thank you for being on this call. I guess the first point is how indicative Q4 is going to be for 2015 and as I sort of said earlier, the caution that I have there is I like to see how all of Q4 rolls out. That’s just I want to make sure we get all that under our belt. It’s a pretty significant change and as we’re forecasting units, dollars, net sales, taking into account the appropriate chargebacks, there is a lot of moving parts to that and while I feel very confident what we’ve got to in terms of our team and our ability to understand what’s there, I’m cautious and I’m cautious just about making those 2015 assumptions, so we don’t like to see all of that. So that’s the first thing I would say. The second thing is that, as Jennifer mentioned, the real sort of, I guess, governor of all this is going to be the spend in R&D, and as I mentioned in my remarks, we’re looking at really moving R&D to a run rate of one to two ANDAs per month compared to 10 ANDAs or 11 ANDAs this year compared to six a year before. So, that implies that just by the nature of the acceleration of those projects, there is the potential for the acceleration of R&D spend as well, which given where we are in PDUFA and given where we are in terms of the competitive landscape probably makes sense. But we’ll do that in a way that lines up with where we are in terms of topline and so I guess the last thing I would say is we are in the middle of our – or I guess actually the beginning of our 2015 formal budgeting planning process and so without wanting to get too far ahead of that, I would go back to some fundamental principles, and the principles that we have are we expect to grow this business responsibly. We do expect on March 28, 2015 the launch of our diclofenac 1.5% topical solution product. So that will be a little bit of an incremental bump in topline. We get to see what’s going to happen in terms of the organic product portfolio. We’ll try and make some determinations of what we think will happen from the R&D spend side as well. So that’s a very long way of saying I’m not willing to give you a yes or no answer yet on what it’s going to look like, but we feel very positive about how 2015 looks right now.

[Ken Marsh:]

I didn’t expect a yes. We’re going to earn $5 million in retrofit. Of the $400 million growth that the -- of things that are pipelined at, what kind of a percentage do you believe is achievable. Are we talking about let’s say 20% or 25%. I believe it depends on how many other generics are out there and quote each products as you break it down, but as a rough growth balloon maybe you’re shooting out of $400 million, can we assume that we are targeting let’s say the lower 25% or so?

[Jason Grenfell-Gardner:]

I think Matt, Scott and Rohit have all done some really good work on this, and I would kind of point you to I think the directional thinking that they have there. It’s really kind of a two step process. The first is to kind of think about what the average market looks like for the generic topical space and we think on average most of these markets are two-player markets already. So we would be the third player in a market. Some of them are one-player markets, some of them are a three-player markets, but on average we are looking at around two-player markets. Generally when enter as the third player and two-player market already, we see two sort of functions. First, what’s required to get customers to switch from there, and start supplier to you and we use sort of fairly standard industry assumption of around 20% of the switching costs for people to make that change and then we assume what sort of market share should we target as the third player and so that would probably be around 20% as well, and historically that’s where we’ve kind of filtered out if you look at our current market shares today.

[Ken Marsh:]

Did I mislead or am I on target in my thinking with when you did your purchase from AstraZeneca that they were going to do the manufacturing for you initially on our injectables or am I thinking incorrectly about that?

[Jason Grenfell-Gardner:]

So those products are not currently on the market and they wouldn’t manufacture them. We would have to move them to a new manufacturer to initiate manufacturing again.

[Ken Marsh:]

And then my last question, I guess, is my understanding is with the topical going, I don’t remember the date but there was a change going on that you’d have to have a shelf life of let’s say six months before you submit data and ensure stability on new ANDAs. How many of those are in your pipeline that are waiting or let’s say sitting on the shelf in that situation waiting for the clock to tick by and be able to have the data that they require?

[Jason Grenfell-Gardner:]

Ken, you are absolutely on point. That rule came into effect for actually all generic pharmaceutical products on 20th of June of this year. So there was a sort of three month speed bump in our submission pipelines that meant we submitted things in June and then there was a three month speed bump. We didn’t do anything in the third quarter and you can see those start to pick up again in the fourth quarter. So there is four to five that will be filed in the fourth quarter this year. There are obviously products on stability for the first quarter and even second quarter, but overall I would say again we’re sort of sticking to that guidance one to two ANDAs a month as we get into 2015.

[Ken Marsh:]

I think you guys are doing a terrific job and I really appreciate the conference call and the work that you guys put out every day. That includes you Jennifer as one of the guys. Thanks you.

[Jennifer Collins:]

Thanks, Ken.

[Operator:]

Our next question will come from Rohit Vanjani of Oppenheimer. Please go ahead.

[Rohit Vanjani:]

Congrats on the quarter. Just wondering if there was any update on some of your specific original ANDA submissions. I think you had one that filed in September 2010 that’s been sitting up the agency now around 48 months, another one you filed in November 2011 sitting up the agency now close to 36 months. Any updates on those two specific ones?

[Jason Grenfell-Gardner:]

We’ve responded to the complete response letter on the first one. Your reference it is with FDA and has been for a couple of months now. With respect to the other, I know we’ve had feedback from the FDA that feedback said call us in three months. That’s just [indiscernible].

[Rohit Vanjani:]

So the CRL for the first one, what was the issue with the product, does it basically -- does the clock start over there?

[Jason Grenfell-Gardner:]

We don’t really go into disclosing all of those in bits and pieces and what goes in these complete response letters. Some of them are technical, but I think the teams adequately answered all of the issues. There shouldn’t be really anything outstanding.

[Rohit Vanjani:]

And then, you were mentioning just kind of CMOs for the AstraZeneca product, would you go to market in second half ’15 based on your CMO relationship and then switch over to your own [builder block] [ph] facility. In that case, will there be any interruption in the supply?

[Jason Grenfell-Gardner:]

That would be the idea. I wouldn’t anticipate that there would be an interruption of supply. We would manage the inventory to be able to deal with that. That should be fine.

[Rohit Vanjani:]

And then, where are you on sourcing the API, can you file a – for most of those products?

[Jason Grenfell-Gardner:]

We recently returned from the largest API conference which is CPhI in Paris a couple of weeks ago. Really encouraged by the availability of what we are looking for. In a number of cases, we found that our existing suppliers in those applications still had active DMS and still have the ability to supply. The issue is one of confirming standards, confirming impurity profiles, ensuring that processing methodologies haven’t changed, so there is still some more working through that has to be done. I would say that if you go by what the office generic drugs has given out as guidance, that it’s likely to use a default scenario that many of these things will be prior approval supplements and that’s just because of the way that the OGB thinks about risk of reactivation of discontinued products particularly in cases where the sponsor hasn’t had specific experience with that molecule at specific form. That being said, I feel confident that as a result of the nature of the portfolio with nine of the 17 products being on drug shortage and the recent guidance on prior approval supplements giving shorter time frames for review and acceptance on products related to drug shortage that will actually be able to give many of these products through that process in time frames that would be largely comparable to what one would expect to CBE-30 process.

[Rohit Vanjani:]

So the second half ’15 time frame is a combination of you assuming a PAS but also expeditor review type of thing?

[Jason Grenfell-Gardner:]

Yes.

[Rohit Vanjani:]

And then on the $200 million addressable market for the AstraZeneca products, how much you said nine of 17 are drug shortage, how much of the $200 million do the drug shortage products represent?

[Jason Grenfell-Gardner:]

That’s a good question. I don’t know the answer to that off the top of my head, but I would actually put a little asterisk next to that. In a couple of cases, the drug shortages have been so severe that the IMS data are skewed and it’s skewed to the downside just because there are no sales or there are very limited sales because frankly there’s very limited inventory. So, we give you because we try to maintain a very consistent methodology about how we report IMS sales, we report them directly at MAT as they come out of IMS. Given the drug shortage nature of some of these products, there may be some opportunities to do better than what the reported IMS sales currently is running at.

[Rohit Vanjani:]

And then the last one from me Jason, you mentioned diclofenac 1.5%, Jason, I know we’ve talked about PENNSAID in the past, I also know your focus may be on bigger issues like business development, but any reaction to Horizon taking over PENNSAID, how does that compare to the Nuvo Mallinckrodt combination?

[Jason Grenfell-Gardner:]

It’s a really interesting dynamic, isn’t it? I think it’s going to create a bit of turbulence with respect to the transition from the 1.5% to the 2%. As you and I’ve spoken in the past, the sort of formulary exclusion that has happened in some cases has already caused a bit of a drag on that. The most recent data I looked at, which was I think the August monthly data, is still showing about a 50-50 split in scripts between the 1.5% and the 2%. I got to imagine that really this turbulence that could be caused in the transition between Mallinckrodt and Horizon could actually shift some of that share back towards the 1.5% in the short run but that’s just speculation. We have to see really how it’s going to turn out. Frankly, I think it’s probably, on balance, good news for us.

[Rohit Vanjani:]

Yes. So you are looking at it opportunistically. That’s what’s kind of the gist of my question.

[Operator:]

(Operator Instructions) The next question will come from Allan Troy, a private investor. Please go ahead.

[Allan Troy:]

Congratulations on a great quarter. I see you have a projection for the fourth quarter in revenues of about $12 million to $13 million, would I be correct in assuming that the revenues for 2015 will be upwards in the range of $50 million plus based on your projections for the fourth quarter?

[Jennifer Collins:]

As Jason kind of talked about on the last couple of questions regarding this topic, the [indiscernible] price increases happened in September and we’ve gotten the first few weeks in October to really see those price increases coming through and the units. So that’s something that we’re still pretty close to evaluating on a month-to-month basis and I think that we’ll be a little bit more comfortable come December 31 and on our Q4 call to give you a little bit more clarity in terms of what 2015 could look like. So we’re not quite ready to say Q4 and times it by four for next year. We have a little bit more homework to do there and we’ll keep you updated as quickly as we can on those topics, but I think for now, we’re a little hesitant to give 2015 numbers quite yet.

[Operator:]

And this will conclude our question-and-answer session. I would like to turn the conference back over to Jason Grenfell-Gardner for any closing remarks.

[Jason Grenfell-Gardner:]

Well, if there are no further questions, it reminds me to say thank you again for joining us on this call. We look forward to continuing to execute here in 2014 and hopefully seeing some of you at the upcoming, either Piper Jaffray Investor Conference or the Oppenheimer Investor Conference, both of which will be in New York City this December. Thank you again for taking the time to join us today and have a great afternoon.

[Operator:]

Ladies and gentlemen, the conference has now concluded. We thank you for attending today’s presentation. You may now disconnect your lines.