Recro Pharma, Inc.
Q4 2018 Earnings Call Transcript

Published: 19 Feb 2019

[Operator:]

Good morning, and welcome to the Recro Pharma Fourth Quarter and Year-End 2018 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will be given at that time. [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 call conference call to discuss Recro's fourth quarter and year-end 2018 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. In addition John Harlow, Executive Vice President Commercial is in the room and will be available during Q&A. 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 and full year ended December 31, 2018. 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 our 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 on our products development plans for our product – our other products candidates including the results and timing of any further 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 other words of 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 in the 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 on file with the Securities and Exchange Commission and available on the SEC's website. Any information we provide on this call is provided only as of the day of this call February 19, 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 maybe 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 full year ended December 31, 2018. Specifically we may discuss adjusted net loss and adjusted net loss per share operating income as adjusted which is operating income without the impact of ASCO number 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 adjusted net loss and adjusted net loss per share 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. In addition, on this call, we will include references to IV meloxicam an investigational product. Use of IV meloxicam has not been approved by the FDA. The safety and efficacy of the investigational use of IV meloxicam has not been determined. There is no guarantee that IV meloxicam will be approved for marketing by any regulatory agency. I would now like to turn the call over to Gerri Henwood. Gerri?

[Gerri Henwood:]

Thank you, Claudia, and good morning, everyone. Thanks for joining us on today's call. Late 2018 and early 2019 were very active on several fronts as we completed a number of important corporate initiatives that we believe are meaningful to our future growth and success. Last week we announced a new five year manufacturing and supply agreement between Recro Gainesville and Novartis, whereby Gainesville will continue to be the exclusive supplier to Novartis of Ritalin long-acting and Focalin extended release capsules through 2023. Our Gainesville facility has been cultivating a close relationship with Novartis for nearly two decades and this new five-year contract extension speaks to both the strength of our continued partnership as well as the value Recro Gainesville brings to our overall corporate enterprise. In early January, we announced an amendment to our existing credit facility with Athyrium Capital Management, the terms of which provide continued access to important debt funding. Under the prior agreement, Recro Pharma had secured $100 million in credit from Athyrium of which we had drawn $60 million. The remaining $40 million was no longer going to be available to us because funding of those tranches was contingent on receiving FDA approval for IV meloxicam by December 31 of 2018. However, this new amendment restored the availability of the remaining $40 million, the first $10 million of which was funded in December of 2018. Going forward, an additional $15 million will become available upon the FDA's approval of IV meloxicam and the final $15 million will be available following early sales traction with IV meloxicam. We're very fortunate to have such a strong partnership with Athyrium and we appreciate their willingness to work with us to reframe the structure of this debt facility in a way that's helpful to us. We continue to evaluate opportunities to further leverage the Gainesville facility due to its continued strong performance. In December of 2018, we also amended the global license agreement with Alkermes concerning the structured milestone payments for IV meloxicam. Under the prior agreement, we owed Alkermes the milestone payment of $45 million upon approval of IV meloxicam by the FDA. Under the terms of the new amendment, we paid Alkermes $5 million in January of this year and we will make two additional payments of $5 million one in April of this year and one within 180 days following approval of IV meloxicam by the FDA. We will then pay to Alkermes a total of $45 million in seven equal annual payments of $6.4 million each commencing upon the first anniversary following FDA approval. We're extremely pleased with the outcome of this amendment because it reduces our cash requirements for 2019 by approximately $30 million and extends the payments over a seven-year period. Importantly, the combined revised consideration for the amended milestone payment schedule results in a net present value of $45 million utilizing an approximate discount rate of 11%. And finally, during the fourth quarter of 2018, we opened an expanded 24,000 square foot development and high potency product services facility in Gainesville, Georgia. The new site which is located near the existing 97,000 square foot DEA-licensed CDMO facility houses an expanded space that will be used for solving development stage product needs such as formulation, process, and analytical issues for oral dosage forms and will provide additional suites for clinical trial, supply, manufacturing, and related services. This expanded facility also has specialized suites dedicated to development and GMP manufacturing of high potency product. This strategic expansion of our CDMO facilities was executed in response to increased demand that we're seeing from our clients, especially with respect to addressing formulation and manufacturing challenges. For years now the Recro Gainesville team has been offering our clients the highest quality services and we believe these additional facilities and capabilities will allow us to provide an even broader range of high quality services both to our existing customers as well as to new potential clients and partners. All of these important achievements happened on the backdrop of strong performance from our CDMO division where we set a new annual record with 2018 revenues of $77.3 million. I would personally like to thank everyone at Recro Gainesville for their dedication and hard work which led to another record year. Before I turn the call over to Ryan for the financial highlights, I'd just like to touch on our ongoing IV meloxicam efforts which are centered on publishing the clinical data and developing our commercial infrastructure in advance for the potential launch in the first half of 2019. Over the past few months, I'm also pleased to note that all of the Phase II and Phase III clinical trial data has either been published or accepted for publication in peer-reviewed pain or surgical-focused journals. This represents over eight publications that report on a significant body of evidence regarding the efficacy, safety, and opioid reduction for IV meloxicam. Additionally, there were 14 abstracts and poster presentations in 2018 including a poster presented in December of 2018 titled "An Ex-vivo Assessment of the Effects of Meloxicam IV on Platelet Function." The data reports IV meloxicam's lack of effect on platelet function and that IV meloxicam achieve roughly the same closure times as untreated controls and numerically shorter closure times than ketorolac. Additionally, we've been developing a strong and experienced team, comprised of professionals with significant expertise in leading product launches at a wide range of world-class commercial stage organizations. As we enter 2019, the medical community continues to express to us the need for a long-acting non-opioid alternative, which we remain confident, would be a welcome addition to the physicians' analgesic tool kit. We continue to believe that as a novel non-opioid candidate IV meloxicam has the potential to play a meaningful and differentiated role in the management of moderate-to-severe pain. And our prelaunch efforts are focused on planning for physician adoption in the event of approval on our upcoming PDUFA goal date on March 24, 2019. With that, I'll now turn the call over to Ryan for the financials. Ryan?

[Ryan Lake:]

Thanks, Gerri. Good morning, everyone. Since we issued a press release and our Form 10-K earlier this morning, outlining our full financial results, I'll just review some of the key fourth quarter and year-end 2018 highlights. As of December 31, 2018, we had cash and cash equivalents of approximately $38.5 million. For the full year 2018, financial results revenues generated from our contract manufacturing division for the full year 2018 were $77.3 million, compared to $71.8 million for the full year of 2017. The increase of $5.5 million in 2018 revenue versus 2017 was due to an increase in product sales to various commercial partners and increased profit sharing including the impact from the new revenue recognition standard recognized from one of our commercial partners. Cost of sales were $43.2 million and $38.2 million for the years ended December 31, 2018 and 2017, respectively, which increased due to product mix and an expansion of our services and development capabilities as well as growth in manufacturing demand. Research and development expenses for the full year 2018 were $40 million, compared to $33.1 million for the full year 2017. The increase of $6.9 million in 2018 primarily resulted from an increase in pre-commercialization manufacturing costs for IV meloxicam, which must be expensed until after approval, an increase in development costs for other pipeline products, an increase in Phase IIIb clinical trial costs and a modest increase in salaries and benefits expense. These increases were partially offset by a decrease in Phase III clinical trial costs and the NDA filing costs in the prior year. General and administrative expenses were $36.9 million and $25.4 million for the years ended December 31, 2018 and 2017, respectively. The increase of $11.5 million was primarily due to higher commercial team personnel and pre-commercialization consulting costs associated with IV meloxicam's anticipated launch in the first half of the year. These costs were reduced in the second half of the year following the CRL through cost-savings initiatives focused on prioritizing our spend on strategic value and growth drivers. The increase in general and administrative expense is also attributed to public company costs, including legal fees, business development costs in our CDMO segment, as well as increased professional fees related to the CRL issued by the FDA regarding our NDA for IV meloxicam. Income tax expense for the year ended December 31, 2018 was $17.4 million primarily due to recording of a onetime noncash $28.8 million income tax valuation allowance against our domestic deferred tax assets. The recording of a valuation allowance in the fourth quarter of 2018 was driven by the amendment of the milestone payments due Alkermes coupled with our international tax structure and history of earnings in the United States. Income tax benefit was $1.9 million during the year ended December 31, 2017 as a result of the Tax Cuts and Jobs Act of 2017. Included within income tax benefit for the year ended December 31, 2017 was a non-cash adjustment of $7.9 million for the re-measurement of the deferred tax items using the new 21% statutory tax rate. Net loss for the full year of 2018 was $79.7 million or $3.90 diluted loss -- net loss per share compared to a net loss of $50.1 million or $2.63 diluted net loss per share for the full year 2017. Adjusted net loss which is a non-GAAP financial measure for the full year 2018 was $50.9 million excluding the $28.8 million impact of recording a onetime non-cash income tax valuation allowance mentioned earlier. Adjusted net loss per share also a non-GAAP financial measure for the full year of 2018 was $2.49. Adjusted net loss for the full year 2017 was $38 million excluding the $12.1 million tax reform adjustment and tax effected debt charges. Adjusted net loss per share for the full year 2017 was $1.99 per share. Turning now to the fourth quarter 2018 results, revenues from the CDMO division for the fourth quarter 2018 were $17.8 million compared to $19 million for the fourth quarter of 2017. The decrease of $1.2 million in revenue was primarily due to lower profit sharing, including the impact from the new revenue recognition standard as well as reduced royalties. These reductions were offset by increased product sales. Cost of sales was $12.1 million and $10.4 million for the three months ended December 31, 2018 and 2017 respectively. The increase is due to product mix and expansion of our service and development capabilities, as well as growth in manufacturing demand. Research and development expenses for the fourth quarter of 2018 were $10 million compared to $9 million for the fourth quarter of 2017. The increase of $1 million was primarily due to an increase in pre-commercialization manufacturing costs for IV meloxicam an increase in Phase IIIb clinical trials and related cost and an increase in development costs for our other pipeline products. These increases were partially offset by a decrease in salaries and benefits expense and Phase III clinical trial costs. General and administrative expenses for the fourth quarter of 2018 were $7.4 million compared to $8.4 million for the fourth quarter of 2017. The decrease of $1 million was primarily due to a decrease in personnel costs. Net loss for the fourth quarter 2018 was $41.3 million or $1.92 diluted net loss per share compared to a net loss of $24.1 million or $1.26 diluted net loss per share for the fourth quarter of 2017. Adjusted net loss for the fourth quarter of 2018 was $12.5 million excluding the $28.8 million impact recording of onetime non-cash income tax valuation allowance mentioned earlier. Adjusted net loss per share for the fourth quarter of 2018 was $0.58. Adjusted net loss for the fourth quarter of 2017 was $12 million, excluding the $12.1 million tax reform adjustment and tax effected debt charges. Adjusted net loss per share for the fourth quarter of 2017 was $0.63. As we look ahead to 2019, we expect revenue generated from the CDMO division to be approximately $80 million with operating income of approximately $23.5 million and EBITDA as adjusted of approximately $34 million, taking into consideration existing contracts and timing of customer order patterns as well as our experienced with customer's product market estimations. I'll now turn the call back to Gerri for closing comments. Gerri?

[Gerri Henwood:]

Thank you, Ryan. Looking ahead to 2019, we see a potentially transformative year for Recro as we await the upcoming PDUFA goal date set for March 24, 2019. We believe we've set the stage for our future commercial and corporate success. In the meantime, we remain focused on building and preparing our commercial infrastructure to be ready to launch IV meloxicam, our first commercial product, if it is approved by the FDA and ensuring the full potential of this novel, non-opioid treatment from moderate-to-severe pain can be realized. We've had an eventful start to 2019. We look forward to maintain the positive momentum that we created. I'd now like to open the call for questions. Operator?

[Operator:]

That concludes our prepared remarks. We'll now open the call to your questions. [Operator Instructions] Our first question comes from David Amsellem of Piper Jaffray. Your line is open. David, if your telephone is mute, please unmute.

[David Amsellem:]

Sorry, can everyone hear me?

[Gerri Henwood:]

Yes. David. Thanks.

[David Amsellem:]

Okay. Sorry about that. So a couple of questions. So first on the CDMO business. Can you just talk about the role of that business in the overall organization going forward as IV meloxicam gains traction and as you build out your hospital infrastructure, can you talk about at a high-level the fit that the business has? And if it ultimately does not have a core fit with what you're trying to build, how do you think about options for the business? That's number one. And then number two on IV meloxicam, can you just remind us, how you're thinking about pricing per patient per course? And how the availability of Ofirmev generics, which isn't that far away impacts your thinking one way or the other? Thanks.

[Gerri Henwood:]

Well thanks. These are quite a bunch of questions, David. Thanks for them though. So we'll start off with the CDMO. So obviously, we have been very pleased at the performance of that business and the prospects for the future for that business we believe are bright. With the -- we had a little bit of expense this year, building out some of the facility and making sure we had the right staff for that, but demand seems very good. And we believe that that will continue to be very contributory to that business going forward. We're obviously not getting full valuation credit for that business, which is very disappointing given the transactions that have taken place over the last several years. And that plays into long-term thinking as well. While we continue to benefit from the non-dilutive capital that we get from that business and have the opportunity to leverage that business creating more non-dilutive capital that help with the launch of IV meloxicam. We will continue to evaluate whether or not there is an opportunity to get full value for that part of the business and to look at whether at some point in the future potentially in the relatively near future potentially a little bit longer than that whether there is an opportunity to monetize that business, if we are not able to get full credit for its contribution to us, as well as obviously full credit for meloxicam. With respect to IV meloxicam how are we thinking about the pricing and the per patient per course, I'm going to ask John Harlow to address that and the prospect of a potentially generic OFIRMEV as well.

[John Harlow:]

Thanks Gerri. Good morning, David. First as it relates to the pricing per patient, what we've said previously and have done some additional work post-Complete Response is that the customer acquisition price will be approximately in the range of $80 to $100 per patient or per day and that's based on a lot of feedback from formulary decision-makers. As it relates to the days of therapy, obviously in the hospital outpatient department and in the ambulatory surgical center we would anticipate that patients receive typically one dose in those settings of care. And then in the inpatient marketplace, what we've looked at is a range between one to two days based upon analogs of other products and how these IV analgesics are typically used in the inpatient setting. So again the customer acquisition price in the range of $80 to $100 one day – one dose per patient outpatient and ASC and then somewhere between one to two in the inpatient. As it relates to your question about the impact of a generic availability of OFIRMEV we actually just had a recent advisory board meeting with a number of experts and key opinion leaders in the space. And what we're assuming right now is somewhat of a net neutral impact to the product. You could see both sides of the equation of which way it goes. The positive thing for a product like IV meloxicam is that multimodal analgesia continues to be important in this therapeutic category and increases patient outcomes. And therefore using products concomitantly that have different mechanisms of action such as an acetaminophen versus a COX-2 selective product such as IV meloxicam would deem beneficial. So we think right now that there could be a positive to a neutral effect because the budget dollars once the generic Ofirmev was available would be opened up so to speak. So hopefully that provides a little bit of commentary on that second question.

[David Amsellem:]

Yeah. No that's very helpful. And if I may just ask a quick follow-up. So this is on kind of tied to the access question and P&C Committees. I mean, we've obviously seen changes in terms of the reimbursement landscape. EXPAREL got a code at the beginning of this year. I mean what are your thoughts on how that may benefit you? And maybe talk to coding and how you're thinking about that for IV meloxicam? Thanks again.

[John Harlow:]

Sure David. Good question. As it relates to reimbursement, I think it's important to remember new products fall into a different reimbursement timeline than existing products such as an EXPAREL as you said. So, first off, we clearly are seeing the marketplace moving towards an outpatient environment and -- such as EXPAREL now is being reimbursed in -- separately in the HOPD as well as in some parts of the ASC depending upon the procedure. For newer products such as IV meloxicam, we will have miscellaneous C and J-codes which will be available immediately day one of launch. And then we would obviously apply both for a unique C-code and J-code and they have both very different respective timelines which assuming positive reimbursement and application that the C-code would become available towards the end of 2019 and then the J-code, if IV meloxicam is approved by the end of March of this year, would become available in 2020. So, you really look at a newer product has a very different reimbursement coding timeline than an existing product. If we were to receive a C and ultimately J-code a unique for IV meloxicam, we would enjoy pass-through status for approximately three years. And at that time, post those three years, I think given the way the landscape is going of reimbursing IV analgesics we could anticipate a situation where we would continue to be separately reimbursed, but that's a long time away to really get into a lot of detail at this point.

[David Amsellem:]

Okay. Appreciate the color. Thanks.

[Gerri Henwood:]

Thanks David.

[John Harlow:]

Welcome.

[Operator:]

Our next question comes from Leland Gershell of Oppenheimer & Co. Your line is open.

[Leland Gershell:]

Thanks. Good morning. Thank you for taking my question.

[Gerri Henwood:]

Sure.

[Leland Gershell:]

I wanted to ask about the business prospects of the 24,000 square foot facility as we head into 2019. I know that's come online towards the end of last year and in particular, your guidance this year looking at your revenue growth in the CDMO side over the last couple of years was $80 million for current year guidance from $77 million and then up from $72 million or so to $77 million the year before is that guidance really only includes the 97,000 square foot and does not include any expectations for the 24,000 square foot?

[Gerri Henwood:]

No, we have expectations for the new development facility. In fact it was really a overcrowding situation in the pilot plant area that we had within Gould, the 97,000 square foot facility and demand generated by our business development team given the formulation expertise as well as the ability to continue through the commercial manufacturing that we can provide that prompted us to look at a leased facility that was quite inexpensive to lease, so we could do fit-out within in order to be able to pretty quickly respond to client demand. So there are -- there is work in that facility that's begun already. There is more that has been signed for that facility. We do expect what for us would be significant revenue to be earned by virtue of that facility and related, let's call it more mature products that have come through development that will be going to next step perhaps in Gould as well. So, yes, we -- if we look at our product mix, while we have the good fortune to have great relationships with Heather and Novartis and others some of these products are mature and will be over time and in some cases are gradually decreasing. And so we have been planning and new business has been a part of it. We'd like for it to be an even bigger part of it and think this facility really opens up that opportunity to us and have had a specially strong interest as well for high potency facility, which is one-half of the facility is dedicated to high potency. And so we do have good expectations for that and that is contributory towards the growth expectations we have for 2019.

[Leland Gershell:]

Okay, great. Thanks. And then just a pipeline question on the NMB candidates, RP1000, I think that was scheduled to head into the clinic sometime in the first half. Is that -- what's the status of that asset?

[Gerri Henwood:]

Yeah. So we have both, the 1000 and the 2000 neuromuscular blockers are progressing. There had been some non-clinical work that was pretty inexpensive that had to get completed before we could go forward that is on line to complete for the 1000 to permit moving into a dose-escalation study. There is manufacturing work that has to be completed before that to move into such a study. We have gotten the API. We need to make drug products again not terribly expensive. And very honestly we are looking at the NMB spend as a little bit movable as required based on our financial situation. We are expecting continuing to evaluate opportunities to further lever Gainesville and improve the balance sheet. And so a lot will depend on the timing of that. We think that in principle all other things being equal, sometime in the summer we would be in a position to be able to consider to initiate the 1000. 2000 is a little further behind because it has some more non-clinical and the synthesis was a bit tougher and I think we're finally through that but hopefully by the end of the year or early next year, we will be able to move that one along without overspending on R&D.

[Leland Gershell:]

All right. Thanks very much. I’ll jump back in the queue.

[Gerri Henwood:]

Thanks, Leland.

[Operator:]

Our next question comes from Esther Hong of Janney. Your line is open.

[Esther Hong:]

Hi, good morning.

[Gerri Henwood:]

Good morning, Esther.

[Esther Hong:]

Morning So two questions. So first with respect to the CDMO business, can you provide a little more color on where growth will be coming from in 2019? And then how much of the $80 million guidance for 2019 incorporates new business? And then the second question is just with the March 24 PDUFA date coming up for IV meloxicam, can you just remind us of commercial preparations for potential launch? Thanks.

[Gerri Henwood:]

Sure. Thanks, Esther. So with respect to the CDMO business, we are expecting some organic growth in the business it's already done at Gould based on currently existing customer forecasts for the 2019 year for them. Some of that will conceivably also come from some profit sharing arrangements that have modestly improved in the fourth quarter of 2018. New business will be a part of that. We haven't given guidance for new business, per se, as a segment. We'd like to be getting into a really nice run rate for that before we start making a specific announcement of it, but it would be notably contributory in 2019. With respect to the meloxicam PDUFA date, we have been retaining our key account managers. As you may recall, we had severed much of our commercial staff from the field point of view back when we got the Complete Response Letter in May of last year. The exception to that was the key account managers. They have been very busy in interactions with formulary professionals and helping us to understand and map where things will be a little bit faster and where things may take a little bit more time. That background and description is going to be very helpful. And we are in the process now of looking at candidates for our regional business director position. John, do you want to talk a little bit about that?

[John Harlow:]

Yes, sure. Good morning, Esther. So from a commercial preparation standpoint, as Gerri stated in her opening remarks, we are in the process of building out the commercial organization. We have identified our regional business directors who are frontline managers and we anticipate to onboard them over the next several weeks. And then assuming a positive approval at or around our PDUFA date of March 24, we would then begin to scale up the sales organization from a hiring standpoint, ultimately a training standpoint and then head into launch, again assuming approval around the PDUFA date towards the back half of the first half of the year. All the other additional prelaunch and commercial work has, for the most part, been completed and now we're waiting for approval. Hopefully, that provides some color for you.

[Esther Hong:]

Thank you.

[Gerri Henwood:]

Thanks, Esther.

[Operator:]

Our next question comes from Scott Henry of Roth Capital. Your line is open.

[Scott Henry:]

Thank you and good morning.

[Gerri Henwood:]

Good morning.

[Scott Henry:]

I'm just going to dig a little deeper into IV meloxicam. As we approach the PDUFA date, can you give us any color of how we should think about revenue in the first year or at least within calendar year 2019?

[Gerri Henwood:]

So, as John mentioned, we're looking at having people in the field, really, as we're looking at the month of June. I mean, it's not very likely that we'll have any significant presence before that, because of our conscious decision to delay hiring until after the PDUFA date. So we are looking at then running like hell to try and get to as many formularies as we can in addition to trying to push, as we've talked about before, the trial usage that could happen earlier, we believe, at ASCs, and possibly selected hospital outpatient departments, where they're not tightly controlled by their parent institution. So I think we have modest expectations for what the sales number could be for 2019. We haven't given guidance on that, yes, Scott and part of that has to do with trying to get our partners on the accounting side to help in clarifying the conditions under which we will be able to recognize revenue, like we're a young company with no returns history, so how much will be required to be put aside for potential returns and allowances and therefore, not recognized, those kinds of things. I think what will be important for us, we're not looking at a situation where our plan is to discount our way to success. There will be certain very large provider organizations where modest discount could make sense. But in general, we think units will be pretty reflective of where ultimate revenue will come from. Whether or not we can recognize all of it in the first sort of six, seven months of our commercial history, we'll have to see. But we believe this product has really strong legs. We believe there is a desire for it out there and that there is not impressive levels of resistance at the formulary level. I mean of course everybody is always concerned about their budgets. But -- so we think we'll have a good start and we would look at 2020 as a year when we would think that we'll have a more representative piece of the sales curve under our belt.

[Scott Henry:]

Okay. Great. That's helpful. And then I'm not sure, if you're going to provide this, but could you give any color on what you would expect total launch costs to be in 2019?

[Gerri Henwood:]

Well again, we haven't given guidance on that either, Scott. But we have talked with you and with many, many of our investors at conferences and other venues about the fact that the cost per rep is reasonably well known in the space. I mean you're looking generally in the sort of 225-ish fully loaded range per rep. You are looking at about -- in this space, we see most companies launching spending in the neighborhood of $10 million to $12 million a year in out-of-pocket spend. So that gives you kind of a circle of where we're looking. And we're obviously going to be looking at ROI on our reps looking at trying to be as efficient as we possibly can. We know that every dollar is hard one that we have to spend and we're going to squeeze the most out of it, while making sure that we're doing so in a compliant fashion.

[Scott Henry:]

Okay. Great. And then on the manufacturing business any thoughts on how we should see the yearly progression there? Should it look similar to 2018? And as well how should we think about margins? I believe there were some accounting changes that perhaps make the margins look a little lower but no cash flow impact?

[Gerri Henwood:]

So Ryan do you want to talk about that?

[Ryan Lake:]

Yes. So the overall gross margins for the CDMO business were very strong for the year. They were in the 40s and then they were in a similar range last year. We believe that the margins will continue to be in that 40% range for 2019 based on our anticipated prospects for the year.

[Scott Henry:]

Okay. And then the sequential progression throughout the year?

[Gerri Henwood:]

As you know Scott, this is a little bit of a challenging business because we don't control the timing on things. Our customers orders, oftentimes we have maybe one or two clients that are very aggressive in their expectations for the year as they put in their forecast at the end of the fourth quarter and then they adjust as the year goes through. And often -- as you will have seen this year and in past years often the fourth quarter is a little bit lighter because people have gotten their inventory and they don't want to hold more inventory at the end of the year. So it's not going to be like a quarter-over-quarter growth a way that you would see if it was your own product that you would hope to be progressing. That's where hopefully, the segment reporting will come in handy once we have IV meloxicam on the market because you'll be able to see the progression of both sides of the business hopefully clearly but just keep in mind that it is not always a sequential quarter-over-quarter thing because of the nature of client ordering patterns.

[Scott Henry:]

Okay. Great. Final question, there'll be a lot of I guess noise in the financials in 2019. You'll have change in contingent consideration valuation. And you will have all the Alkermes payments. How do you expect or can you give any color on how the accounting treatment should impact the numbers in 2019 as we try to model that?

[Gerri Henwood:]

Ryan, how's your crystal ball on that?

[Ryan Lake:]

So, I think there's a couple of things and we provided some additional color in the 10-K that was filed this morning as well. But the contingent consideration amount both the short term and long term was about $90 million as at the end of the year. And we would expect that to increase by approximately $30 million upon approval.

[Scott Henry:]

Okay. And those payments to Alkermes will you book those fully when they take place? Or will you amortize those?

[Ryan Lake:]

So those payments as Gerri mentioned earlier in the call so $5 million was paid in January $5 million will be paid in April after the PDUFA and then six months after approval, another $5 million will be paid. Those will come-off of the balance sheet. So those won't go through the P&L. Those will go against the contingent liability on the balance sheet.

[Gerri Henwood:]

Which might be the only thing – that's the only thing you can really like about contingent consideration, because otherwise I find it not very helpful in clarifying.

[Scott Henry:]

Perfect. And then I guess just one clarification. The $5 million payment in April is that contingent upon approval? Or how firm is that commitment?

[Gerri Henwood:]

It's a firm commitment that was part of the quid to get the rescheduling of the payments.

[Scott Henry:]

Okay. Great. Thank you for taking the questions,

[Gerri Henwood:]

Thanks very much Scott.

[Operator:]

[Operator Instructions] Our next question comes from Patrick Trucchio of Berenberg Capital.

[Patrick Trucchio:]

Thanks. Good morning. Certainly, in the crafting of the DEA quota for 2019 I believe the agency disaggregated IV opioids and solid-dose opioids based on feedback from industry. So it looks like the IV opioids have less of an impact from a quota perspective. So I have a few questions about this. The first one is that – is that correct? Is that the right way to think about IV opioids in terms of the quotas this year? And secondly, can you tell us if this has – is the shortages of IV opioids or if hospitals broadly are still having issues? And then I have one other follow-up.

[Gerri Henwood:]

So with respect to the IV versus solid, we are aware that there has been discussion around solids because we happen to manufacture one of those. We believe we've heard the same rumors that you have Patrick. I don't have any primary data source for IVs not being impacted in terms of quota, but what we hear and it is more anecdotal from many of our experts is that there is a persistence of shortage of the small-volume parenterals which include IV opioids out there in many hospitals. I have a daughter who is an emergency medicine doc up in Boston and their institution still is going through a shortage of available IV opioid. So I think it is still an issue and that might have influenced DEA's thinking with respect to not restricting quota there too.

[Patrick Trucchio:]

Got it. So then assuming, if IV meloxicam is approved on March 24, how much of the shortage could IV meloxicam help with? How much -- just in terms of taking into account formulary coverage, manufacturing, how quickly do you think that you can meet this -- any incremental demand?

[Gerri Henwood:]

So one of the factors that we think was seen in Ofirmev's sales last year was its participation in trying to relieve some of the shortages. We hear from clinicians and I'll let John talk about that in a second. We hear from clinicians who are treating patients that they are still frustrated at not having as many available options as they feel they need for the patients and we think meloxicam could play a role. John, do you want to comment on that?

[John Harlow:]

Thanks, Gerri. And good morning, Patrick. I agree with Gerri. So we continue to hear that it's sporadic, but some accounts it's impacting more than other accounts, the shortages of the IV opioids. We follow the FDA website and their shortages section very closely. And many of the IV opioids still have a statement that they're currently in shortage. We've also seen many of the hospitals make very quick decision to utilize other products like an Ofirmev like a long-acting bupivacaine to compensate for that shortage. And in parallel they've commented on when is your PDUFA date and we would have a greater appetite to review a product like IV meloxicam, even quicker than we would without the shortage. So it really is account dependent though Patrick. From a supply standpoint, we are anticipating having enough supply based upon the demand in the marketplace and are hoping for a fast upstart. So again, I think not only does the opioid epidemic create a tailwind for the launch of IV meloxicam, but so does the shortages as it relates to other products that are used for Post-Op Pain Management.

[Gerri Henwood:]

And honestly, I think also institutions that for one or another reason have tracked their reduction of opioids have noticed they also have less expense. And I think in certain accounts that has prompted them to want to be even more deliberate about trying to foster usage of more non-opioids such as IV meloxicam to further improve their outcomes and their return.

[Patrick Trucchio:]

Got it. That's helpful. Thank you very much.

[Gerri Henwood:]

Thanks, Patrick.

[Operator:]

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

[Gerri Henwood:]

Thank you very much for your time this morning and for your support of the company during the past year and we look forward to having a terrific 2019. We hope to be meeting with you and talking with you again soon. Have a great day and thanks for your time.

[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.