Recro Pharma, Inc. (REPH) CEO Geraldine Henwood on Q2 2018 Results - Earnings Call Transcript

Recro Pharma, Inc. (REPH) Q2 2018 Earnings Conference Call August 7, 2018 8:00 AM ET

Executives

Natalie Wildenradt - IR

Geraldine Henwood - CEO, President & Director

Ryan Lake - CFO

Analysts

David Amsellem - Piper Jaffray Companies

Kenneth Trbovich - Janney Montgomery Scott

Scott Henry - Roth Capital Partners

Leland Gershell - Oppenheimer & Co.

Patrick Trucchio - Berenberg Capital

Operator

Good morning, and welcome to Recro Pharma Second Quarter 2018 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 Natalie Wildenradt, Investor Relations. You may begin.

Natalie Wildenradt

Good morning, and thank you for joining us on today's conference call to discuss Recro's second quarter 2018 financial results. This is Natalie Wildenradt, and I am joined today by Gerri Henwood, President and Chief Financial 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, 2018. The press release is available on the News & 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 provision of the Private Securities Litigation Reform Act of 1995, including statements related to our financial outlook; our ability to raise capital in 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 timeframe associated with such resolution and our product development plans for other product candidates, including the results and timing of any future, preclinical studies and clinical trials for such product categories. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our expectations and forecasts, can be identified by words such as expect, plan, will, may, anticipate, believe, estimate, upcoming, should, intend and 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 section of Recro Pharma's annual report on Form 10-K for the fiscal year ended December 31, 2017, which is on file with the Securities and Exchange Commission and 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 7, 2018, 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 as preliminary and does not purport to project financial positions or operating results of the company. Actual results may differ materially.

We may also discuss our noncash financial measures with respect to our financial performance for the six months ended June 30, 2018. Specifically, we may discuss the earnings before interest, taxes, depreciation and amortization or EBITDA for our contract development and manufacturing organization or CDMO business.

We believe that these non-GAAP financial measures help one understanding our CDMO business as it gives investors greater transparency in to the supplemental information used by management in evaluating the financial performance of our CDMO business. These noncash financial measures should be considered in addition to, but not as a subject for, reported GAAP results included in our earnings release and to be discussed on this call.

We have included a reconciliation of EBITDA to 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 and 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?

Geraldine Henwood

Thank you, Natalie, and thank you all for joining us this morning. As many of you know, in May, we received a Complete Response Letter from the U.S. Food and Drug Administration, for the New Drug Application for intravenous meloxicam, our non-opioid preferential COX-2 inhibitor for the management of moderate-to-severe pain. Since the receipt of this CRL, our team has been focused on working with the FDA to address the concerns outlined in the CRL.

In July, we participated in a Type A end-of-review meeting with the FDA to discuss the topics covered in this CRL. We know everyone is interested to understand what the next steps and path forward could be for IV meloxicam, and we plan to provide an update on the outcome of this meeting, once we receive the written meeting minutes from the FDA. While we were surprised and disappointed by this CRL, we continued to believe that the NDA package, we accrued and submitted is adequate for approval. Based on what we hear from the FDA and their meeting minutes, we'll be in a better position to determine next steps.

Before turning the call to Ryan Lake, our Chief Financial Officer, for a review of our financials, I'd like to briefly touch on a few of the recent highlights. In May, we announced the issuance of three new IV meloxicam patents by the U.S. Patent Office. The issuance of these patents is a significant expansion of the IV meloxicam intellectual property portfolio, and we anticipate that one of these new patents will be Orange Book listable as a product-by-process patent with the patent expiry in 2030. We remain committed to protecting the valuable innovations arising out of IV meloxicam's clinical development and look forward to further expanding this robust intellectual property portfolio.

In June, the positive Phase III abdominoplasty data were published online in the peer review journal Plastic and Reconstructive Surgery Global Open. During the quarter, we also presented eight posters of the 43rd annual meeting of the American Society of Regional Anesthesia and Pain Medicine. The posters highlighted IV meloxicam data from Phase II and Phase III clinical trials across several moderate-to-severe pain settings, including abdominoplasty, bunionectomy, major orthopedic procedures as well as opioid use in certain important patient populations, like patients of advanced age with renal impairment. And last, but not least, the continued impressive performance of our Gainesville CDMO division. I'll now turn the call over to Ryan to discuss our financial highlights. Ryan?

Ryan Lake

Thank, Gerri. Good morning, everyone. Since we issued a press release in our Form 10-Q earlier this morning, outlining our full financial results, I'll just review some of the key second quarter highlights. As of June 30, 2018, we had cash and cash equivalents of $49 million. Our contract development and manufacturing division continued to perform extremely well during the second quarter, generating revenues at $21.7 million compared to $16.9 million for the second quarter of 2017. The increase of $4.8 million in revenue included the impact from the new revenue recognition accounting standard, and was primarily due to increased profit sharing recognized from one of our commercial partners and an increase in product sales to one of our commercial partners.

Cost of sales were $12.1 million and $10.4 million for the three months ended June 30, 2018, and 2017 respectively. The increase was primarily due to increased product sales. Research and development expenses for the second quarter 2018 were $10.2 million compared with $7.1 million for the second quarter of 2017. The increase of $3.1 million was primarily due to an increase in precommercialization manufacturing cost for IV meloxicam, an increase in salaries and benefits expense, an increase in Phase IIIb clinical trials and related costs and a modest increase in development costs for our other pipeline products. These increases were partially offset by a decrease in Phase III clinical trial costs incurred in the prior year period.

General and administrative expenses for the second quarter of 2018 were $13 million compared to $6.3 million for the second quarter of 2017. The increase to $6.7 million was primarily due to increased commercial costs as well as increased legal and consulting fees associated with addressing the CRL issued by the FDA regarding the NDA for IV meloxicam.

We are reaffirming our 2018 CDMO guidance, and believe we will generate approximately $70 million in revenue, despite the anticipated unfavorable impact from the new revenue recognition standard and taking into consideration existing contracts and timing of customer order patterns as well as our experience with customer's product market estimations.

There may be a small amount of upside to that figure, possibly a couple of million, but our belief is that we will end the year with approximately $70 million in CDMO revenue. We are encouraged by our CDMO business development activities and believe we are well positioned to continue to build our business in 2019.

I'll now turn the call back to Gerri, to briefly discuss some of the other acute care product candidates. Gerri?

Geraldine Henwood

Thanks, Ryan. While IV meloxicam is our lead program, the acute care division isn't solely limited to this one product candidate. In April, preclinical data were presented for our novel anesthetic neuromuscular and reversal agents at the Association of University Anesthesiologists 2018 Annual Meeting. These preclinical data demonstrated not only the effective and rapid activity of the ultrashort-acting neuromuscular blocking agent in a preclinical primate model, but also showcased the ability of the rapid-acting reversal agent to antagonize the molecule and induce recovery.

We believe these agents represent significant value drivers within our Acute Care pipeline, with the potential to enhance both induction and recovery of neuromuscular blockade in the surgical setting. We look forward to providing more updates on this program in the future. I'd now like to open the call for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from the line of David Amsellem of Piper Jaffray.

David Amsellem

So I know you're not providing a detailed update on meloxicam until you get the meeting minutes, but I wanted to pose a hypothetical. So you talked about your view that you're confident that you have an approvable product. So I guess with that in mind, what's the likelihood of potentially this process going to dispute resolution? That's number one. And then, number two is just taking a step back and looking at the language of the CRL, there was some vague language around the secondary analyses and language around it not being up to FDA expectations? Do you have any color on what the agency means by that? And perhaps, is that something where the agency is starting to migrate towards looking at studies with active comparators because we've seen that - in the past, we've seen other companies look at active comparators, we saw it came up with panel for Pacira's Exparel. So I'm just trying to get an understanding of what you think the agency might mean by that.

Geraldine Henwood

Yes. So David, as you can imagine, with this particular division, it is - one has to be careful because there are sometimes thoughts that have occurred to them post meeting that might appear in the minutes. So I'll be a little bit circumspect in my remarks, but I would say that the last point that you raised about active comparators is not a topic that has been raised in our conversation with FDA. And we would be surprised by that since within the program there were active comparator trials that were included, although those were Phase II trials. So the CRL was vague, we're hoping that with the clarification or confirmation of the minutes, we'll be in a position to give more detail in the not terribly distant future. We would expect that hopefully, sooner than that, but at the worst, by the middle of September, we believe we should be in a position to provide some path forward that we could describe in some more detail.

David Amsellem

Okay. And if I may just sneak in a follow-up just on the question of dispute resolution because it did come up post CRL. And I guess, I'll ask it again, I mean, is that something that is a potential scenario as a path forward?

Geraldine Henwood

So as we said at the time that we had the call around the CRL, we believe that we have an adequate and well-described package for IV meloxicam that was part of the NDA that we filed with fulfilling the statutory requirements for efficacy demonstration and for a good risk-benefit profile because of safety profile. So while we would remain hopeful that there might be a path that could be more straightforward, and that we're relying part on what comes from the minutes, we certainly do believe that this package is adequate to support approval. And if that meant that we needed to consider dispute resolution, it is something that we would consider.

Operator

Our next question comes from the line of Ken Trbovich of Janney.

Kenneth Trbovich

Gerri, I just wanted try to get an update on the, sort of, Phase IIIb study. So it would appear that you might have additional data here in the back half of the year. I know that might, in some ways, provide a benefit, in other ways, it complicates things depending on the path forward. Can you give us a sense as to, sort of, how we should be thinking about those Phase IIIb studies and the timing of the outcome for those?

Geraldine Henwood

Sure. At the time that we received the CRL, we would have been in a position to do some of the - use some of the tools that we've used in the past to help progress studies a little bit more quickly, but made the decision both because we didn't have further regulatory input at that time, and also for financial reasons to not go ahead and escalate the steps that we would have taken to get those studies completed. They would've been very likely first quarter anyway, but we did not do the escalation that would have, kind of, put that in the bag. So they're running a little bit longer than that at a lower monthly rate of expense than they would have been running had we done those escalation steps. But they would - we certainly would expect them to complete in '19 as of where we stand right now, but probably a quarter maybe a little bit more than that delayed from the first quarter target that we would've hoped to have hit.

Kenneth Trbovich

Okay. So we don't have to, sort of, be concerned with the data set on the one hand that was submitted to the agency as part of the NDA and a separate asset that, obviously, they would want to see but potentially hasn't been filed as part of the NDA?

Geraldine Henwood

No. We would not be in a position to provide such a data set. And I think, one of the - there are some differences with those studies, and that they are dosing patients at - during surgery or very close to the surgical onset time. So there's little a difference in the design of those studies versus the efficacy studies as required by the FDA. But, no, we don't believe that we'll have them caught between us and no harm in hand at the time that we're getting a regulatory decision from the agency.

Kenneth Trbovich

Okay. And then can you give us a sense then as to how we should be thinking about, sort of, the spend rate. I know you folks have provided some general guidance on the CDMO business, but I think one of the challenges we all have from the outside looking in is an example of what was just discussed on the R&D plan, and perhaps how that spending plan has perhaps changed a bit. How should we be thinking about their spend with regard to SG&A, and those sorts of things that are non-CDMO related?

Geraldine Henwood

Yes, so I think, we'll be in a better position to give more detail on that after we've seen the minutes because as you can imagine there are multiple paths kind of open now, and that will help us to confirm our own beliefs about where we were at the end of that meeting. In general, we have taken steps to cut where we had the opportunity to do that discretion. So for instance, as we have conveyed we did not go ahead and hire the sales force that had been contingently qualified. So that expense was not incurred, but we had hired regional sales directors who would've been responsible for those individuals because they were not hired, it did not make sense to retain those individuals for an indeterminate period of time. So we did reduce staff by that number of individuals as well as a modest decrease in each of the commercial departments. And have a slowed our plans to add some new people in other departments that would have happened had we gotten approval. So in general, we're trying to be financially prudent and give ourselves more runway, but I'd like to defer giving some specifics on the numbers until we come back, hopefully, in less than a month but you know at the worst by the middle of September, we'll give you some more feedback qualitatively and hopefully, quantitatively what that would look like.

Kenneth Trbovich

Okay. And then just last question. You guys, kind of, eluded to this earlier, but with regard to CDMO business in the opportunity specifically, I guess, new opportunities until tableting them, I'm just, sort of, curious if there's any more detail or a sense as to the big volume even if it's just, "Hey, we've seen 10 potential submissions versus three in the back half of last year." Is there any metric at all we can sort of think about or will look to as to how that business looks to be progressing potentially?

Geraldine Henwood

Yes, so I think as you know, we added some senior members to our team both in the second half of 2017, and in the first half of this year. And that has increased proposal volume dramatically. And it isn't just around tableting, although, we're happy to see that too. There are some early pilot projects that are underway in the tableting area, which we would hope could grow to become something more than that over time. We also have shortly available facility that is within 10 minutes of the plant that will able to high-potency products, and that's both at the development stage and could for many projects handle them up through commercial as well as expanded formulation development capabilities to allow us - this is, as you can imagine, a lot more demand in the early stage for companies who need help especially, younger companies, on solving formulation problems, analytical problems and the like. And that scenario where we're seeing more proposals and where we have won some projects and are initiating some work.

Operator

Our next question is from the line of Scott Henry of Roth Capital.

Scott Henry

First, regards to getting the written minutes. Could you remind me, do they have a target timeline to get you those minutes? Is it 30 or 60 days or is it just an approximation based on prior occurrences?

Geraldine Henwood

So there is a guidance that says that the minutes of such a meeting should be 30 days. This division - because perhaps their workload, et cetera, doesn't always hit that, sometimes they'll run a couple of weeks longer than that. So it's somewhere in that range.

Scott Henry

Okay. Great. And then the other question I had on the CDMO business. You're clearly - your guidance could have some upside to it. But even with a couple of million upside, the numbers trail on the second half. And my question is, from a long-term trend, is that just noise on the current year? Because what I'm wondering is, should we expect 2019 to be more reflective of the first half, the second half or the full year? I mean, really, what I'm trying to get sense do you continue to expect growth in 2019 over 2018?

Geraldine Henwood

Yes. We do continue to expect the growth in 2019 over full year 2018. And I think, as we've talked about before, there are some ins and outs that cause individual clients to want to have a higher ordering pattern in one part of the year than another, but it's the overall year that we think is the most reliable gauge of where growth is going to be. So we do think that we will see growth overall, '18 over '17, and that we will see growth in 2019. This year we had the added factor of the revenue recognition change that has some impact on what the total number we will report out is. But even considering that, we're looking at $70 million plus some modest additional amount as Ryan indicated. Ryan, do you want to add anything to this.

Ryan Lake

No. I mean, it's a great business, it's a strong business. We continue to reaffirm that $70 million with a couple of millions of upside. And as Gerri mentioned, generally, kind of follows a pattern where the fourth quarter might be a little bit lighter.

Scott Henry

Okay. And then, are there any changes within the components of that CDMO business that should we - should factor in? Such as any products losing patent exclusivity or just any kind of levers that maybe we should be thinking about over the next 12 to 18 months?

Geraldine Henwood

So we look at 12 to 18 months, I think, one of the things that we hope will engender even further wins is more space dedicated to new formulation and analytical at a very modest cost, and the ability to take on high-potency products because you could understand why those would not be an easy fit in the main plant because with that plant wasn't set up to deal with a high containment issues associated with those products. So there had been a number - and as you know, there are a lot of companies in the oncology space that may have products that would fall into that category. But we really couldn't help before or solve problems for before, now we're - we'll be in a position to be able to do that. And so I think, we are looking forward to that increasing demand for our new business activities, and are seeing very active response in the part of customers to these kinds of offerings. So those are positives that we see. In terms of negatives at the end of 2019, the remaining patent on the Novartis franchise goes off, but we continue as you - we've seen with Focal, and to believe that we'll have good demand and our relationships with Novartis is staying strong. And we are providing supplies for the Sandoz division as well as for Novartis and believe that, that's going to continue.

Operator

Our next question comes from Leland Gershell of Oppenheimer.

Leland Gershell

I wanted to ask as we await the meeting minutes, if you have any further thoughts with the possibility that label negotiation to perhaps get a narrower label to get IV meloxicam approved, and then perhaps expand that with further studies. If that's a path that is under consideration, I think, we had - that had come up in earlier discussions, I wanted to ask and see what your thoughts are on that thing.

Geraldine Henwood

Sure. So to the extent that we can arrive at descriptions and the label that would satisfy FDA's areas of concern or a lack of clarity, as the case may be, and again, that will - we hope be better reflected in the minutes, we would certainly be open to such things. We believe and hope that there is because of the amount of data that we filed with this 505(b)(2) filing, that there is sufficient information to provide a good description in the label of the product and its activities. So we'd hope that there might not be any for further studies to firm that again, but all that remains to be seen. And, I guess, the first step in that is getting those minutes. But thank you for the question.

Leland Gershell

Okay. And then one follow-up, again, sort of, along the same lines in terms of the NDA. With once every 24-hour dosing, obviously, that provides a nice convenience advantage, but also may be something - an area where there could be improvement of potency with the product if the dosing frequency were increased. Is that something which is part of your discussions or under consideration in terms of being able to perhaps satisfy what the FDA is looking for here on the efficacy side?

Geraldine Henwood

So I guess the best way for me to describe right now where we believe FDA is, is that there certainly had been a lack of understanding of the intended clinical role that an agent like this could play. And that was something that we're guessing at of going into the meeting, and we hope that confirmation in the minutes will allow us to see that. We did bring experts who were able to, without the company having to say, talk about real life clinical usage and the utility of an agent like this. But beyond that, I'm loath to get into more detail just because - until we've got the minutes back, we only have our interpretation of that.

Operator

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

Patrick Trucchio

Just to follow-up on some of the various scenarios, particularly on the label adjustment. In this scenario, can you tell us how soon might you respond to the CRL? How soon might that response occur? And how soon might the application be reviewed?

Geraldine Henwood

These are great questions, Patrick, and certainly the $64 million questions. I will say that we are prepared to be quick in taking action once we have the minutes back, and that could take a number of different forms. So right now, I can't give you the time, but that's what we hope that we'll be doing that with mid-September. It could be - there are questions about whether and when to resubmit the formal response of the CRL or is there a period of some discussion before that or is there an appeal. I think a lot of things depend on what the minutes demonstrate to us. So based on what we see there, then I think, we'll be in a better position to describe to you and to investors what's the basis for our thought that this is the path forward, and how does it look as best we can determine it based on what we've seen them corroborate in their version of the minutes. Sorry, I can't give you more.

Patrick Trucchio

I'm sorry?

Geraldine Henwood

I'm sorry that I can't give you more information, but there's just too many options.

Patrick Trucchio

Yes. No, understood. So then just in relation to the CDMO business. This business seems to be performing ahead of your expectations that you held the revenue guidance. So I'm wondering what is driving the upside specifically. And what is it about the business or what's happening in the business that suggests these results won't continue in the second half? And then, secondly, can you confirm that you still expect EBITDA from this business to be approximately $30 million in 2018?

Geraldine Henwood

Ryan?

Ryan Lake

Yes, sure, Patrick. So as we saw through the first six months of the year, we saw some favorability from the new revenue recognition adoption standard and then the second half of the year just due to timing of some shipments on the way that we recognize the revenue. As we described earlier, we do see the second half being a little bit lighter, but still reaffirm that $70 million plus some upside guidance.

Geraldine Henwood

EBITDA.

Ryan Lake

Yes, your second question was regarding the EBITDA, yes, we're reaffirming that $30 million in EBITDA.

Patrick Trucchio

And we do also...

Geraldine Henwood

And, Patrick, again the fourth quarter, generally, is the lighter quarter for this business. So there's nothing unusual about that pattern.

Patrick Trucchio

Okay. And then would you also be expecting EBITDA to grow in 2018 as well - 2019, I mean?

Geraldine Henwood

Yes. We would be expecting. Especially, related to new business, baseline business has an opportunity to continue to grow, and we have no reason to believe it won't. But in addition to that, we're adding in the new business targets that we have, that would be somewhat contributory as well.

Operator

We are showing no further questions. I'll now turn the call back to Gerri, for closing remarks.

Geraldine Henwood

Okay, thank you. Thank you, operator, and thank you all for joining us here this morning. We look forward to giving you more information communicating additional updates on our progress as we work towards resolving the IV meloxicam CRL, and working both to advance Acute Care and CDMO divisions of the company. Thanks again for your - joining this morning. Take care, goodbye.

Operator

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