Recro Pharma, Inc.
Q2 2019 Earnings Call Transcript

Published: 8 Aug 2019

[Operator:]

Good morning, and welcome to the Recro Pharma Second Quarter 2019 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded at the company's request.I would now like to turn the call over to Claudia Styslinger, Investor Relations. You may begin.

[Claudia Styslinger:]

Good morning, and thank you for joining us on today's conference call to discuss Recro's second quarter 2019 financial results. This is Claudia Styslinger, and I'm joined today by Gerri Henwood, President and Chief Executive Officer; and Ryan Lake, Chief Financial Officer. Following prepared remarks today by Gerri and Ryan, we will open the call for questions.Earlier this morning, we issued a press release detailing our financial and operating results for the three months ended June 30, 2019. The press release is available on the News and Investors page of our website at recropharma.com.Before we begin our formal comments, I'll remind you that various remarks we make today constitute forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements related to the spin out of our acute care business; financial outlook; our ability to raise capital on terms acceptable to us; our ability to resolve the Complete Response Letter issued by the U.S. Food and Drug Administration on our New Drug Application for IV meloxicam and the time frame associated with such resolution; and our product development plans for our other products' candidates, including the results and timing of any future preclinical studies and clinical trials for such product candidates. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our expectations and forecasts and can be identified by words such as expect, plan, will, may, anticipate, believe, estimate, upcoming, should, intend and any words of other similar meaning.Any such forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties. These risks are described in the risk factors and Management's Discussion and Analysis of Financial Condition and Results of Operations sections of Recro Pharma's Annual Report on Form 10-K for the fiscal year ended December 31, 2018, and any quarterly reports on Form 10-Q, which are now on file with the Securities and Exchange Commission and are available on the SEC's website. Any information we provide on this conference call is provided only as of the day of this call, August 8, 2019, and we undertake no obligation to update any forward-looking statements we may make on this call on account of new information, future events or otherwise. In addition, any unaudited or pro forma financial information that may be provided is preliminary and does not purport to project financial positions or operating results of the company. Actual results may differ materially.We may also discuss certain non-GAAP financial measures with respect to our financial performance for the three months ended June 30, 2019. Specifically, we may discuss operating income as adjusted, which is operating income without the impact of ASCO #2014-09, and the earnings before interest, taxes, depreciation and amortization and non-cash stock-based compensation, or EBITDA, as adjusted for our contract development and manufacturing organization, or CDMO business. We believe these non-GAAP financial measures are helpful in understanding our CDMO business as it gives investors greater transparency into the supplemental information used by management in evaluating the financial performance of our CDMO business. These non-GAAP financial measures should be considered in addition to, but not as a substitute for, reported GAAP results included in our earnings release and to be discussed on this call. We have included a reconciliation of operating income as adjusted and EBITDA as adjusted to the GAAP measures in a supplemental financial schedule, which has been made available on the News & Investors page of our website at recropharma.com.I would now like to turn the call over to Gerri Henwood. Gerri?

[Geraldine Henwood:]

Thank you, Claudia, and good morning, everyone. Thank you for joining us on today's call. I will begin today's call with an overview of recent accomplishments within the CDMO segment.I’m pleased to announce that the manufacturing business continues to outperform generating second quarter revenues of $31.3 million, a 44% increase compared to the second quarter of 2018. For the 6 months period, the CDMO business generated $56.3 million in revenues, a 36% increase from the comparable 6 months period in 2018.We're very happy with year-to-date sales performance and the trajectory of continued year-over-year growth. Given the strong first half results, organic growth from existing customers and new business prospects, we are raising our 2019 full-year CDMO revenue guidance from $85 million to $87 million to an anticipated $91 million to $94 million.Turning now to the Acute Care segment. As many of you know, in March, we received the second complete response letter from the US Food & Drug Administration for our new drug application seeking approval for intravenous meloxicam, a non-opioid preferential COX-2 inhibitor for the management of moderate to severe pain.The second CRL focused on onset and duration of IV meloxicam noting FDA's view the delayed onset, sales to meet prescriber expectations for IV pain drugs. The CRL also cited FDA's concerns about the role of IV meloxicam of monotherapy in acute pain. Given the FDA's interpretation of the clinical trials data as well as how it would meet patient and prescriber needs in that setting, we continue to pursue FDA approval for IV meloxicam as well as evaluate other possible corporate structures including a plan to spin out the Acute Care segment and have the CDMO business and the Acute Care business as two separately traded public company.Following receipt of the second CRL, we reduced operating expenses of the Acute Care segment, including a reduction in staff of approximately 50 employees. The headcount reduction did not impact employees in the CDMO segment. We believe this initiative will significantly reduce the 2019 planned cash burn and we anticipate becoming cash flow positive in the second half of 2019.With that, I'll now turn it over to Ryan.

[Ryan Lake:]

Thanks, Gerri. Good morning, everyone. Since we issued a press release and our Form 10-Q earlier today outlining our full financial results, I will just review some of the key second quarter highlights. As of June 30, 2019, Recro had cash, cash equivalents and short-term investments of $32.4 million.Revenues and cost of sales were $31.3 million and $14.1 million, respectively for the second quarter of 2019 compared to $21.7 million and $12.1 million for the second quarter of 2018. The increase of $9.6 million in revenue was due to increased royalties recognized from two of our commercial partners and an increase in product sales to one of our commercial partners.Cost of sales increased primarily due to expansion of our services and development capabilities as well as growth in manufacturing demand, which was partially offset by operating efficiencies that we gained as a result of higher production volumes.Research and development expenses for the quarter, second quarter of 2019 were $7.2 million compared to $10.2 million for the second quarter of 2018. Excluding the $2.6 million of costs associated with the strategic restructuring initiative recorded in the second quarter of 2019 to decrease $5.6 million was primarily due to a decrease in pre-commercialization manufacturing costs for IV meloxicam, shift of focus of our CDMO formulation and development capabilities to cost of sales activities, a decrease in development costs for other pipeline products and a decrease in personnel costs.General and administrative expenses for the second quarter of 2019 were $10 million, compared to $13 million for the second quarter of 2018. Excluding $3.4 million of costs associated with the strategic restructuring initiative recorded in the second quarter of 2019, the decrease of $6.4 million was due to a reduction in commercial team personnel and related costs following the CRL, which suspended our preparation of the anticipated launch of IV meloxicam.For the second quarter of 2019, the company reported a net loss of $2.8 million or $0.13 per share compared to a net loss of $12.7 million or $0.62 per share for the same period in 2018.For the six months ended June 30, 2019, revenues and cost of sales were $56.3 million and $28.5 million, respectively compared to $41.3 million and $22.6 million for the same period in 2018. The increase of $15 million in revenue was due to increased royalties recognized from one of our commercial partners, an increase in product sales to various of our commercial partners.Cost of sales increased primarily due to expansion of our services and development capabilities as well as growth in manufacturing demand, which was partially offset by operating efficiencies gained as a result of higher production volumes. Research and development expenses for the six months ended June 30, 2019 were $16.7 million compared to $18.6 million for the same period in 2018, excluding $2.8 million of costs associated with the strategic restructuring initiative recorded in the six months ended June 30, 2019. The decrease of $4.7 million was primarily due to the shift of focus of our CDMO formulation development capabilities to cost of sales activities, a decrease in pre-commercialization manufacturing costs for IV meloxicam and a decrease in personnel costs, slightly offset by an increase in development costs for other pipeline products prior to the second CRL.General and administrative expenses for the six months ended June 30, 2019 were $24.2 million, compared to $22.5 million for the same period in 2018. Excluding the $4.4 million of costs associated with the strategic restructuring initiative recorded in the six months ended June 30, 2019, the decrease of $2.7 million was due to decreases in commercial team personnel and pre-commercial consulting costs incurred for the anticipated launch of IV meloxicam following the receipt of the second CRL. These decreases in costs were offset by increases in costs associated with the debt financing early in the year, public company costs including legal fees, business development costs in our CDMO segment as well as increased professional fees associated with addressing the first and second CRLs issued by the FDA regarding our NDA for IV meloxicam.For the six months ended June 30, 2019, Recro reported a net loss of $4.8 million, or $0.22 per share, compared to a net loss of $25.2 million or $1.27 per share for the comparable period in 2018.As Gerri mentioned earlier, we are increasing our revenue guidance for 2019 from $85 million to $87 million to an anticipated $91 million to $94 million. We're also increasing our CDMO operating income from $28 million to $30 million to $35 million to $39 million and CDMO EBITDA as adjusted from $38 million to $40 million to $44 million to $46 million. These are based on our current trends, including organic growth from our existing customers and new business prospects.All these projections are based on our current CDMO business trends, including organic growth from existing customers and new business prospects. This guidance also takes into consideration existing contracts and timing of customer order patterns as well as Recro's experience with customers product market estimations.I will now turn the call back to Gerri for closing remarks. Gerri?

[Geraldine Henwood:]

Thanks, Ryan. In closing, we’re pleased with the continued success of our CDMO segment in 2019, I’m confident that the Recro Gainesville team will continue executing on their objectives to keep that business strong. In the Acute Care segment, despite the recent challenges, we remain steadfast in our belief that IV meloxicam holds significant potential as a treatment option for moderate to severe pain in multiple acute clinical settings and we remain committed to pursuing FDA approval for IV meloxicam.We also believe that the value of the CDMO is not reflected in our current market cap and as a portion of trying to bring this to recognition, we plan to spin out the Acute Care segment and have the CDMO business and the Acute Care business as two separately traded public company.Thank you for your time and attention today. We'd now like to open the call for questions. Operator?

[Operator:]

That concludes our prepared remarks. We will now open the call to your questions. [Operator Instructions] Our first question comes from Leland Gershell of Oppenheimer. Your line is open.

[Leland Gershell:]

Hey, good morning. Thanks for taking my question and congrats on the great progress.

[Geraldine Henwood:]

Thanks, Leland.

[Leland Gershell:]

Couple of question on the CDMO. Wanted to ask about the nature of the newer business in terms of manufacturing in the old facility versus what may be more sort of R&D focused work in the 24,000 foot. And also want to ask about what extent you see the new business shifting your dependence away from what’s historically been a couple of -- depends on a couple of customers to what may be a broader spectrum of clients? And I’ve a follow-up. Thanks.

[Geraldine Henwood:]

Thanks, Leland. So it's a good question. And not shockingly given the substance of the business that we have had and continue to see is a long-term sticky business that is the commercial business that is in the primary Gainesville plant, that accounts for the majority of revenue and revenue growth. However, there is a growing contribution of new business to the mix and we anticipate as we’ve described several times to you and to others, those business opportunities often start early and getting in early often means you’re doing things that are not huge individual economic value, but are part of projects that can roll forward and continue to gain ground and scope as projects continue. So we have what we're very encouraged by in terms of new business, it is contributory. We think every time it's going to be more and more contributory in addition to a growing base of proposals and wins of proposals that the business development group has been working very hard to accomplish.

[Leland Gershell:]

All right. Thank you. And then in terms of the -- on the spin out plan, so it sounds like that officially decided at this point in terms of that being what you’re going to do, wanted to ask about any thoughts on the timing of that and how that kind of the mechanics of that and how that will occur, whether that will be in the next few months, whether it will be next year event. How we should think about how that plays out? Thanks.

[Geraldine Henwood:]

Yes. So, I mean, obviously we would interacting with the SEC's, so we're not in total control of the timeline, but would anticipate that this is something that would be happening in 2019.

[Leland Gershell:]

All right. Great. Well, thanks for taking the questions.

[Geraldine Henwood:]

Thanks, Leland.

[Operator:]

Our next question comes from David Amsellem of Piper Jaffray. Your line is open.

[Michael Ingerman:]

Hi. Good morning. This is …

[Geraldine Henwood:]

Hi, David.

[Michael Ingerman:]

… Mickey Ingerman on for David. Thanks for taking the question.

[Geraldine Henwood:]

Sure.

[Michael Ingerman:]

First, can you remind us how much capacity you’ve available at the Gainesville facility as well as the New York facility? And then, second, is the plan to following the spin out still develop IV meloxicam internally, or are you still considering finding a commercial partner? And at a high-level, can you describe the extent to which you’ve had discussions with potential partners already?

[Geraldine Henwood:]

Sure. So we will start with the Gainesville questions. So the capacity in the Gainesville plant we would estimate to be approximately 66% to 70% utilization on one shift. That facility has traditionally run two full-time shifts, so there's quite a bit of additional capacity available for growth of new business. In addition to that, if we look at the RCD [ph] facility is, we call the facility that's nearby but not on the campus of the main Gainesville facility. The new business facility development and high potency, we're still in the early phases of utilization. So there is a lot of capacity we'd estimate that we're somewhere in the -- depending on how you look across individual functional areas for services were between 10% and 20% utilized. So there's a lot of room for growth in that space and it's -- one that has shown very well to client. So we anticipate that we will continue to get good reception to that and good proposal win from that. If we then move from there to IV meloxicam, so we continue to be pursuing the appeal we're doing that directly using outside expertise in terms of following through the appeal with the regulatory legal advice as well as other special experts that help in that process. We have not made a determination finally on what we will do with the product as we finally get approval. Certainly, we see is viable options either partnering, we had several parties interested in partnering the product prior to the second CRL. So that could be an option and could provide some needed capital back to the business. And on the alternative side depending on what the mix of products we might have at that point in time could be possibly an asset that we would pursue on a more limited scale of commercialization than we had been previously thinking. We are actively looking for other products, particularly commercial products that could with the modest sales force be economically successful. We’ve a team that had good experience in that regard in the past and would like the opportunity to pursue that we are in active discussions, but we don't have anything in hand at this time.

[Michael Ingerman:]

Okay. That’s helpful. Thank you.

[Geraldine Henwood:]

Thanks a bunch.

[Operator:]

[Operator Instructions] Our next question comes from Patrick Trucchio of Berenberg Capital Market. Your line is open.

[Iris Long:]

Hi. Good morning. This is actually Iris Long on for Patrick. So regarding the separation of the CDMO from the Acute Care business, can you tell us about -- a little bit more about the capitalization of post business, post spin?

[Geraldine Henwood:]

So at this moment in time, I can't give you the detail on that. I can't tell you that the vast majority of the cash would stay with the CDMO and would be staying in the REPH structure. The Acute Care would be spinning out in terms of who stays resident in the current structure and who will go to a new corporate structure. There would be a modest amount of support coming from the parent company to allow for the continuation of the appeal on meloxicam and some basic corporate costs that would be incurred in being a public company. Over time, as we get closer to that moment, we will be able to get more explicit.

[Iris Long:]

Thank you. That’s helpful. Just another question regarding the agreement with Teva on Verapamil. So can you tell us if Verapamil is the full product that’s part of your 6-year contract with Teva, or is there other products that included in this new contract? And also, secondly, historically the agreement on Verapamil looks renewable on a year-to-year basis. So I’m just wondering what precipitate the change to a long-term contract, or why have this not being done before? What are the change in the latest extension? Thank you.

[Ryan Lake:]

So with Teva in the Verapamil agreement that is the only product that is covered under that agreement. As you will recall, we own the NDA for that product, so Teva is our marketing and distribution partner. Historically that was a year-to-year customer. They could theoretically walk, but they couldn’t walk with the product because it's our NDA, our product. Obviously, there's been improvement in the marketplace in both they and us, we are interested in locking into a long-term agreement. They have continued to do a tremendous job with that product, expanding distribution channels from activist to [indiscernible] and now Teva. So we have a very good relationship with them and we're excited to have them as a long-term partner.

[Iris Long:]

Thank you.

[Geraldine Henwood:]

Thank you.

[Operator:]

And we are showing no further questions. I will turn the call back over to Gerri for closing remarks.

[Geraldine Henwood:]

Thank you very much, operator. Thank you all for joining us here today. We’ve been very happy to report these positive results and development for both of our business segments. Wish you all a very good day. Take care.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone have a great day.