Recro Pharma, Inc.
Q1 2021 Earnings Call Transcript

Published: 9 May 2021

[Operator:]

Good day, ladies and gentlemen. And welcome to the Recro First Quarter 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call may be recorded. I would now like to hand the conference over to Stephanie Diaz of Recro's Investor Relations Group. Please go ahead.

[Stephanie Diaz:]

Thank you. Hello, and thank you for joining us. On today's call, we have David Enloe, President and CEO; and Ryan Lake, Chief Financial Officer. Today, we will be providing an overview of Recro's contract development and manufacturing business, including updates on corporate activities and financial results for the quarter ended March 31, 2021. After our prepared remarks, we will welcome your questions.

[David Enloe:]

Thank you, Stephanie, and thank you to everyone who has dialed in and to those who are participating today via webcast. In my first full quarter at Recro, our team-initiated execution of a four-pronged growth strategy that we expect to transform the company in the coming months and years. This strategy calls for the expansion and diversification of our customer base, strengthening our financial position in order to best support both organic and inorganic growth; augmenting the company's leadership and enhancing our operational organization; and finally, continuing efforts to upgrade and expand our facilities and capabilities to support growing customer demand. I'm pleased to report that during the first quarter of 2021, we made progress in each of these areas, with particular success in the expansion of our customer relationships and projects. During the first quarter alone, we secured multiple project wins, including extensions of current customer projects, new clinical trial packaging business and a new capsuling formulation development customer. I will provide details on these achievements following an overview of our Q1 financial results. For that, I'll turn the call over to Ryan.

[Ryan Lake:]

Thank you, David. Good afternoon, everyone. Before I begin, in addition to the brief financial overview I'll provide on the call today, additional details on our first quarter 2021 financial results are included in our press release issued prior to this call and in our Form 10-Q, which was filed today with the SEC. I'll now provide an overview of our financial results for the first quarter of 2021. Revenues for the quarter ended March 31, 2021 were $16.8 million. Though this is a $5 million decrease compared to revenues of $21.8 million recorded during the prior year period, it represents a 70% sequential increase compared to the fourth quarter of 2020.

[David Enloe:]

Thanks, Ryan. As I previewed in my opening comments, my full - first full quarter at Recro was a very active one, during which our team created and initiated execution of a comprehensive plan to grow the company. Today, I'm pleased to report that we've made progress in each of the following four strategic objectives

[Operator:]

Thank you. Our first question comes from Matt Hewitt with Craig-Hallum Capital.

[Lucas Baranowski:]

Yeah. This is Lucas on for Matt Hewitt here at Craig-Hallum. I guess, first off, congrats on the good quarter. And then I guess, you didn't really provide an update on the tech transfer that you've had in progress with the - I believe it's the Japanese pharma company. I think you've been getting a small amount of revenue related to that. Should we expect that to step higher in the back half of the year?

[David Enloe:]

Thanks for the question, Lucas. And what I'll think I'll do is defer over to Ryan for detail on it. I know that we're progressing on that tech transfer. But as for expectations going forward, let me defer to Ryan. Thank you.

[Ryan Lake:]

Lucas, thanks for the question. So we are making progress on the tech transfer, doing registration batches for the customer. And we do continue to generate revenue for that customer as we do those services for them. And as we previously stated, we're currently expecting to also generate commercial revenues from that customer beginning in 2022.

[Lucas Baranowski:]

Okay. That's helpful. And then I guess for your ADHD products, have you begun to see an uptick in orders there now that kids are back in school, at least in some parts of the world?

[Ryan Lake:]

Yes. It's a great question. Lucas, what I would say is that overall, from the data that we review, we can see that the prescription volume trends improved in Q1. But overall, they're still well below baseline for pre-COVID levels. I think that some of the third-party data that we've reviewed recently suggests that there's still going to be that ongoing impact through the first half of 2021 where they're essentially predicting a gap in diagnosis visits still being down roughly 12%. And projecting about a 4% decline in prescription volumes due to those lost diagnosis visits. So overall prescription volumes are still - overall across all therapeutic categories are down in the mid-to-high single-digit range. And more specific to the drugs that we manufacture, the pediatrics therapeutic area is down over 30%. So it's still down significantly. I'd say from an ADHD market perspective, although it's still down pre-COVID levels. It's not down as much as all of the other - the general pediatric category. And it's been relatively stable over the past few quarters.

[Lucas Baranowski:]

Thanks. That's really good color. Those are all the questions I had.

[Ryan Lake:]

Thank you.

[Operator:]

Thank you. Our next question comes from Jacob Johnson with Stephens, Inc. You may proceed with your questions.

[Mason Carrico:]

Hey, guys. It's Mason on for Jacobs. Thanks for taking questions. Appreciate the 2021 guide. As we look at the remaining quarters of the year, how should we think about phasing or seasonality for the balance of this year? Any comments on big puts or takes that we should think about or taking into account?

[David Enloe:]

Go ahead, Ryan.

[Ryan Lake:]

So thanks, Mason. Overall, for the first quarter, as you saw, we were at the high end of the range that we set out achieving 70% sequential growth. So to the same period of last year, we saw the decline, but that was, as we stated before, related to the discontinuation of some previously described product line discontinuations, which were creating some headwind for us. And I think what's important with the guidance is that we're still projecting to grow revenue in the low-to-mid single-digit range and EBITDA in the high single-digit 20% range. And that growth is really a combination of - it's a combination of various things, including the market forces and improvement from last year where we saw more lumpiness from our customers rebalancing their inventory levels.

[Mason Carrico:]

Got it. Thanks for that Ryan. And maybe a more high-level question for David here. It's - in the biologics market, spare capacity is really hard to come by. Even before COVID, it seems like demand was outpacing supply, which COVID has just made worse. Could you maybe talk about the supply-demand dynamic for small molecule manufacturing? And how much spare capacity is there out there in the market?

[David Enloe:]

Yeah, an important question. Thank you. One of the things, I mean, macro that we're seeing is pressure and expectation on biopharma companies to really take a deeper look at their supply chain. And focus on repatriating or transitioning supply sourcing to the U.S., particularly for products being sold in the U.S. And so this is something that's really generated a lot of attention in the space. And one of the reasons we feel good about our position is that we do have the capacity. We are obviously located in the U.S. and the small molecule market remains the largest market. It's - some would say over - most estimates have the small molecule market greater than 50% of the total. Every year for the past several years, there have been more small molecule drugs approved than biologics. And so very quietly, the small molecule market just continues to be the majority position in the market. And because of that, and even a recent pipeline analysis we did showed that there are even a greater percentage of new small molecules in development than biologics, believe it or not, as a percentage. And so the demand for small molecule and oral solid dose is solid. The expectation that production will migrate to or repatriate to the U.S. is a real dynamic that we're seeing. The expectation of biopharma companies that they will have second source put in place for business continuity purposes is a very important dynamic, and it's not just talk anymore. People are really focused on that and the fact that we have that capacity and that historic track record of commercial production bodes well for us and gives us confidence. And that's one of several reasons why, and I know you hear this a lot from a lot of CEOs, but I really do believe that Recro is significantly undervalued. If you look at transaction multiples and EBITDAs that we see in the industry today, you will see that the undervaluation conclusion I draw is pretty straightforward. And while we understand we're currently in a rebuilding mode since I've joined the company, we are hopeful that our valuation will become reflective of that in the coming quarters. So thanks again for your question.

[Mason Carrico:]

Thanks to both you as well. Congrats on the quarter.

[David Enloe:]

Thank you.

[Operator:]

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to David Enloe for any further remarks.

[David Enloe:]

Thank you to everyone participating on today's call and webcast. Many thanks to our partners and our investors. We greatly appreciate your continued support. And a special thanks to all of our employees at Recro. Our employees are the heart of our organization, and it is their dedication to quality and excellence that drives our momentum forward. Thank you again for participating today and for your continued support of Recro.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.