Recro Pharma, Inc.
Q4 2020 Earnings Call Transcript

Published: 27 Feb 2021

[Operator:]

Good day, ladies and gentlemen, and welcome to the Recro Fourth Quarter and Year-End 2020 Financial Results Conference Call. . 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 year ended December 31, 2020. 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. I'm very pleased to join you all for my first earnings call as Recro's President and CEO. Before I begin, I'd like to apologize for rescheduling our earnings call. We had initially planned to issue earnings yesterday, Thursday, February 25, however, our webcast hosting company requested that we reschedule due to a lack of bandwidth on our preferred day, hence, the move to Friday. However, as everyone knows, it's undesirable to issue any news on a Friday post market. So when given the opportunity to move the call to Friday premarket, we decided to do just that. We're sorry for any inconvenience this may have caused, and we don't expect this to happen again. And now I'll turn to Recro. As was reported, I joined the company in December, bringing more than 25 years of experience leading biotech, drug development and GMP-manufacturing organizations. Most relevant, I have experienced leading, building and growing multiple CDMOs. Given this background and lens, the Recro opportunity was immediately attractive to me. Upon first evaluating Recro, I was struck by the facilities, capabilities and the company's exceptional team and manufacturing and compliance track record. Most compelling was the opportunity for significant growth. And after my first 2 months at Recro, I'm pleased to report that my optimism for the future of this organization has grown. I'm very happy to be at the helm of this promising company, and I look forward to reporting our progress in the months ahead. Turning now to the prior year. 2020 was a challenging time for Recro. Variability in customer ordering patterns, a critical change in a competitor's production output and the COVID-19 pandemic, all impacted our top line revenues as well as margins. Since arriving at Recro, my priority has been to carefully evaluate our organization's vulnerabilities, develop a strategy to achieve sustainable growth for the company and to build a leadership team capable of executing. We have made great strides with each of these efforts in the recent months, and I will provide additional details on these achievements following an overview of our year-end financial results.

[Ryan Lake:]

Thank you, David. Good morning, everyone. Before I begin, in addition to the brief financial overview I'll provide on the call today, additional details on our fourth quarter and year-end 2020 financial results are included in our press release issued prior to this call and in our Form 10-K, which was filed today with the SEC. I'll now provide an overview of our financial results from continuing operations for the full year 2020. Revenues for the year ended December 31, 2020, were $66.5 million, a $32.7 million decrease compared to revenues of $99.2 million recorded during the prior year. This decrease was primarily due to the loss of Verapamil SR market share by our commercial partner in the first quarter of 2020 due to the reentry of a competitor whose production had been taken off-line in 2019 and shifts in customer ordering patterns during fiscal 2019. It is important to understand that because of this competitor's facility going offline in 2019, our Verapamil SR revenue had increased dramatically. Now that this competitor is back online, we have seen our commercial partner sustain its pre-2019 market position for Verapamil SR capsules since the end of the first quarter of 2020. Additionally, the COVID-19 pandemic has resulted in decreased end-user demand, inventory rebalancing by our commercial partners and slower-than-expected clinical trial materials new business starts. In addition, revenue declined due to the discontinuation of 2 commercial product lines by our commercial partners. Higher revenues from our new business growth activities has partially offset the decrease, including a significant new commercial product tech transfer project. Cost of sales for the year ended December 31, 2020, was $54.1 million compared to $51 million for the comparable period of 2019. The increase of $3.1 million was not proportionate to the decrease in revenue, primarily due to lower commercial manufacturing volumes and the related impact on fixed costs, expense through cost of sales despite making reductions in the workforce and implementing cost savings measures. Cost savings generated from these activities are expected to continue into 2021. Further contributing to cost of sales was increased costs on higher clinical trial materials new business revenues. Total SG&A expenses for the full year 2020 were $18.1 million, a decrease compared to $19.9 million reported in 2019. The decrease of $1.8 million was primarily related to lower public company costs, which were partially offset by our new business development efforts and the addition of the company's clinical trial support services to our early GMP-centered offerings in the second quarter of 2020. Interest expense was $19.2 million for the year ended December 31, 2020. Consistent with $19 million for the comparable period of 2019, the increase of $0.2 million was primarily due to an additional term loan borrowing under the credit agreement with Athyrium in the first quarter of 2019, offset by a decrease in the LIBOR base rate of interest on our term loans under the credit agreement.

[David Enloe:]

Thank you, Ryan. As I stated in my initial comments, I believe there is a significant opportunity for growth at Recro. During my first few months at Recro, I have been focused on evaluating the company's assets, customers, processes and team in order to best position the organization for sustainable growth and leadership in the CDMO sector. The strategy that we have begun to execute has 4 key components

[Operator:]

. Our first question comes from Matthew with Craig-Hallum.

[Matt Hewitt:]

I think moving the call to the morning was a much better plan. First off, how much -- or is it possible to parse out the Q4 results? How much of that impact was -- are we balancing by customers versus another spike in the pandemic at the time versus the competitor in verapamil coming back on? Is there a way to kind of delineate what the impact was for those 3 pieces?

[David Enloe:]

Yes. Thanks for the question, Matt. This is David. The first part, I'm going to defer to Ryan to answer the detail on that, but I do want to make sure that we think about the impact of timing of new business creation, where anything that we've seen happening in Q4 from a revenue perspective is, by and large, impacted by decisions made by customers far earlier in the year, right? So April, May, June, July, which was the very beginning of the COVID shutdown, if you will, that's when a lot of programs were put on hold. And just due to the uncertainty, there were a lot of decisions deferred. And so those decisions being deferred resulted in delayed responses in contracts and, therefore, lower revenue in the new business. I'll ask Ryan to color in your more specific question about the difference in the different areas and the impacts.

[Ryan Lake:]

Yes. Thanks, Matt, for the question. So as you are aware, we had a notable benefit in 2019 from one of our customer competitors being the verapamil products that they were out of the market due to manufacturing issues. And with that competitor reentering the verapamil sustained release market in 2020, this had caused notable volatility in our quarterly revenue due to the continued rebalancing of inventory by that customer of really inventory that they had ordered in 2019. So we experienced that throughout 2020. This volatility certainly was further exacerbated by COVID. And we believe in 2021, our quarterly revenue volatility should be much less than we experienced in 2020, and we expect to see sequential quarter-over-quarter revenue growth from Q4 2020 to Q1 2021, as David had mentioned, in the 65% to 70% range. And we are tracking in our expectations right now that our full year revenue growth would be in line with kind of industry norms for the small molecule CDMOs. I'd also say, as we've commented in the past, is that as it relates to the fourth quarter, we've typically observed patterns where in the fourth quarter, our customers have tried to lighten up their inventory levels at the end of the year and then replenish those stocks after year-end. So based on the visibility that we have and our customer forecast right now, into the first half of 2021, we are seeing that stabilization of anticipated manufacturing volumes in our projections for 2021. It is -- I've commented on prior calls, I think in terms of the magnitude, the large factor as it relates to our overall revenue decline certainly was related to our verapamil products and the impact that it had from over 2019 due to that competitor being out of the market. I would say about 2/3 of our revenue decline was associated with the verapamil products. And of that, kind of 2/3, I'd say, about 2/3 of that was associated with the competitor and then probably in the 10% to 20% range as it relates to COVID impact. Hopefully, that answers your question, Matt.

[Matt Hewitt:]

No, that's very helpful. And then in the prepared remarks and in the press release, you mentioned that the validation batches for the tech-transferred product will be started here in March. Is that -- is that the last step in the process? I would -- I think those are what in 30-, 60-, 90-day batches. So by Q3, you could potentially be generating revenues or growing the revenues from that new product?

[Ryan Lake:]

I think right now, we're targeting 2022 for commercial revenues from that product.

[Matt Hewitt:]

Okay. All right. And then maybe one last one and I'll hop back in the queue. But with the vaccines being doled out and general reopening, schools coming back online, students going back to class, all those types of things, what are you seeing from a script volume perspective? What are you hearing from customers? Are they coming back to the table after the pause last year? And what is -- how does that kind of factor into your expectations for the upcoming year?

[David Enloe:]

Thanks. This is David again. I'll answer that from my perspective. And that is, a year ago, almost a year ago, when things really came to a grinding halt, especially on new programs, clinical studies, areas like that, all of that came to a halt because of the inability for clinical trials to be safely conducted. You had hospitals where immunocompromised patients were going in for clinical studies, and they were sharing hallways and entries and everything else with the COVID crisis. And that's all been reinvented, I would say. And so the capital that's been raised to fund so many programs over the past 2 and 3 years, as you know, record capital is being deployed, that has -- that have been parked for a while. And these programs, we now see, big picture-wise, we see a lot of those clinical studies starting to open back up in those programs going forward. So certainly, we expect the sales funnel on new business opportunities for noncommercial programs to increase. And I'll -- Ryan has some information on the scripts volume side, so I'll ask him to color in that side.

[Ryan Lake:]

Yes. Thanks, David. So we were just reviewing a third-party industry report that was provided. And there's a $1 billion, or $1 billion gap, in diagnosis visits compared to the prior year. So it's down 30%. And overall, the prescription volumes are still down in the mid- to high single-digit range. And as we commented before, specific to the drugs that we manufacture, in particular, in the cardiology space, overall scripts in the cardiology space are down 18% year-over-year and pediatrics are down 34%. So generally speaking, I'd say that the products that we manufacture are not being impacted as severely as the specialty category declines. So that's a positive for us. And certainly, as COVID hopefully continues to abate, we will be able to see the benefit from that.

[Operator:]

. Our next question comes from Jacob Johnson with Stephens.

[Jacob Johnson:]

Maybe one question on 2021. I appreciate the guidance outpaced the small molecule industry. But can you walk through the puts and takes for 2021? Maybe remind us of any headwinds you're facing, which I think maybe includes some of those discontinued drugs and then maybe hit on the key growth opportunities in your portfolio in 2021?

[Ryan Lake:]

Yes. So thanks, Jacob, for the question. I would say from our core commercial business, we are expecting to see some stability as it relates to the impact that we saw in 2020. Don't forget and recall that we did have 2 product discontinuations. We expect that to create a $5 million to $7 million headwind certainly for us, but we are expecting to see growth in our new business development, clinical trial materials business that will help to offset those decreases. So that is the primary drivers. And then obviously, as the market stabilizes for our customers, we would expect that to be impacted as well and some of the profit share and results that we have.

[Jacob Johnson:]

Got it. That's helpful. And then maybe, David, a follow-up on that. I think the clinical trial material offerings was a key growth initiative for the company under Gerri. I'd just be curious about your thoughts on that business line.

[David Enloe:]

Yes, it remains a priority and an area of growth for us. We think it's important to be able to extend our product portfolio to not just a late-stage commercial products or late-product life cycle commercial products, but also to strengthen our pipeline by having a portfolio of earlier-stage programs we support. We're seeing a growth in that activity, have added a lot of new customers and have an ever-increasing level of conversations that we're having with new possibilities there as well. And importantly, we reoriented our business development team to where we've brought in individuals in specific geographies with that experience where they've been focused historically on those types of projects and programs. And I think that, that's going to begin to bear fruit as well.

[Jacob Johnson:]

Got it. That's helpful. And then maybe last question, and maybe it's too soon on this, but I'll ask it anyways. David, your 4-pronged strategy includes inorganic growth in it. And can you talk about what capabilities you might be interested in adding one day to redraw this portfolio?

[David Enloe:]

A little early. But certainly, I'll say this. We -- Recro is extremely good at what we do in the space that we operate in, in terms of complicated formulation challenges and the ability to deliver robust amounts of commercial product on time in full. And so anything we look for inorganically, that standard has to be maintained. And so certainly, as we step ourselves forward, we will be looking to opportunities that are adjacent immediately or at least 2 steps adjacent so that we can keep that base of knowledge. Remember, we've got 3 decades of manufacturing expertise, regulatory and quality competence on the foundation of this basically newly reoriented, entirely externally focused from top to bottom, customer-facing CDMO. And so I don't want our inorganic activities to distract from what we really provide in an excellent way on a consistent basis. So those are my parameters, and we remain active and open and looking for those sorts of opportunities.

[Operator:]

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. As I hope is evident, I'm very happy to be part of the Recro team. Most importantly, I'm excited with this significant opportunity that lies ahead. Though I've been here only a short time, the plans we've put in motion are already beginning to pay off. Before signing off, I'd like to thank our investors for their continued support. Most importantly, I'd like to thank the entire Recro team of employees, who truly are Recro's most valuable asset. Because of the entire team's commitment to our customer success and to providing high-quality products on time and in full, I have every reason to be optimistic about Recro's future. 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.