Recro Pharma, Inc. (REPH) CEO Gerri Henwood on Q3 2019 Results - Earnings Call Transcript

Nov. 10, 2019 1:34 AM ETSocietal CDMO, Inc. (SCTL)
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Recro Pharma, Inc. (REPH) Q3 2019 Earnings Conference Call November 8, 2019 8:00 AM ET

Company Participants

Claudia Styslinger - IR

Gerri Henwood - President & CEO

Ryan Lake - CFO

Conference Call Participants

David Amsellem - Piper Jaffray

Esther Hong - Janney Montgomery

Leland Gershell - Oppenheimer

Iris Long - Berenberg

Operator

Good morning, and welcome to the Recro's Third Quarter 2019 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will 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 conference call to discuss Recro's third 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 and nine months ended September 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 the company's ability to complete the spin of its acute care business segment; uncertainty of whether the anticipated benefits of this task can be achieved, risks of unexpected costs or delays and the company's ability to complete this spin-off, the company's ability to continue the development and commercialization of IV meloxicam, the company's ability to execute its strategic initiative, the company's ability to adequately result the outstanding labeling issues with the FDA for IV meloxicam and the timeframe associated with any such resolutions.

The company's financial outlook; and the company's product development plans for its other products' candidate, including the results and timing of any future preclinical studies and clinical trials for such product candidate. 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 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 and 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 quarterly reports on Form 10-Q, which are now 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, November 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 and nine months ended September 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 organizations, 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 to Gerri Henwood. Gerri?

A - Gerri Henwood

Thank you, Claudia, and good morning, everyone. Thank you for joining us on today's call. I will begin today with an overview of recent accomplishments within the CDMO segment. I'm pleased to announce that the manufacturing business continues to outperform generating record results.

The third quarter revenues of $25.3 million, represents a 38% increase compared to the third quarter of 2018. Year-to-date, the CDMO business generated $81.6 million in revenues, a 37% increase from the same period in 2018.

We're very pleased with year-to-date sales performance and the trajectory of continued year-over-year growth. Given the consistent strong results, organic growth from existing customers added development services customers and new business prospects, we are raising our 2019 full-year CDMO revenue guidance from $91 million to $94 million to an anticipated $98 million to $100 million.

I'm also happy to announce that during the third quarter of 2019, we achieved consolidated operating profitability earlier than expected and generated $4.8 million in cash from operations. We expect to remain cash flow positive for the second half of 2019, excluding the impact from any potential strategic transaction.

Turning now to the Acute Care segment, for IV meloxicam as many of you know, the US Food & Drug Administration recently granted our appeal of the complete response letter relating to our new drug applications seeking approval for IV meloxicam. We're in the process of preparing a comprehensive response and re-filing, that includes proposed revised labeling and certain other information to the FDA.

Finally, earlier this month our Board of Directors approved the planned spin out of Acute Care business segment which will be known as Baudax Bio Inc., and declared a special dividend distributions of all outstanding shares of Baudax Bio common stocks. For every 2.5 shares of Recro common stock held a record as of the close of business on November 15, 2019 Recro's shareholders will receive one share of Baudax Bio common stock.

Shareholders will receive cash in move of any fractional shares. The special dividend distribution is expected to be paid November 21, 2019. The distribution of Baudax Bio common stock will complete the separation of the Acute Care business segment from Recro. After this separation Baudax Bio will be an independent publicly traded company, focused on developing and commercializing innovative products for hospital and related Acute Care settings and Recro will retain no ownership interest.

Baudax Bio was applied to listing this common stock on the NASDAQ capital market, under the ticker symbol BXRX. No action is required by Recro's shareholders to receive shares of Baudax Bio common stock as a part of the special dividend distribution. However, if any holder of Recro common stock, sales shares of Recro common stock on or before the distribution date, they may be selling the entitlement to receive shares of Baudax Bio common stock.

With that I'll turn it over to Ryan now.

A - 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'll just review some of the key third quarter and year-to-date highlights. As of September 30, 2019, Recro had cash and cash equivalents of $37.9 million.

Revenues and cost of sales were $25.3 million and $11 million, respectively for the third quarter of 2019 compared to $18.3 million and $8.5 million for the third quarter of 2018. The increase of $7 million in revenue was due to increased royalties recognized from one of our commercial partners and an increase in product sales to various of our commercial partners. Cost of sales increased primarily due to expansion of our service 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 third quarter of 2019 were $1.8 million compared to $11.3 million for the third quarter of 2018. The decrease of $9.5 million was primarily due to the decrease in pre-commercialization manufacturing cost 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 third quarter 2019 were $6.9 million, compared to $7 million for the third quarter of 2018. For the third quarter of 2019, the company reported a net loss of $4.3 million or $0.19 per share compared to a net loss of $13.3 million or $0.64 per share for the same period in 2018.

For the nine months ended September 30, 2019, revenues and cost of sales were $81.6 million and $39.5 million, respectively compared to $59.6 million and $31 million for the same period in 2018. The increase of $22 million in revenues 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 service and development capabilities as well as growth in manufacturing demand, which again was partially offset by operating efficiencies gained as a result of higher production volumes. Research and development expenses for the nine months ended September 30, 2019 were $18.6 million compared to $29.9 million for the same period in 2018, excluding $2.8 million of costs associated with the strategic restructuring initiative recorded in the nine months ended September 30, 2019.

The decrease of $14.1 million was primarily due to a decrease in pre-commercialization manufacturing costs for IV meloxicam, a decrease in personnel costs, and a shift of focus of our CDMO formulation and development capabilities to cost of sales activities and a decrease in development costs for our other pipeline products.

General and administrative expenses for the nine months ended September 30, 2019 were $31.1 million, compared to $29.4 million for the same period in 2018. Excluding $4.4 million of costs associated with the strategic restructuring initiative recorded in nine months ended September 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 refinancing earlier 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 nine months ended September 30, 2019, Recro reported a net loss of $9.1 million, or $0.41 per share, compared to a net loss of $38.4 million or $1.91 per share for the comparable period in 2018.

As Gerri mentioned earlier, we are increasing our revenue guidance for 2019 from $91 million to $94 million to an anticipated $98 million to $100 million. We're also increasing our CDMO operating income from $35 million to $39 million to $40 million to $44 million and CDMO EBITDA as adjusted from $44 million to $46 million, to $48 million to $50 million, 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 customers, ordering patterns as well as Recro's experience with customers' product market estimations.

I'll now turn the call back to Gerri for closing remarks. Gerri?

Gerri Henwood

Thanks, Ryan. In closing, we're pleased with the continued success of our CDMO segment in 2019, we look forward to continuing our progress moving towards FDA approval to IV meloxicam NDA. We also remain on track to execute the spin-out of the Acute Care business segment during the fourth quarter, the result of which will be two independent publicly traded companies, Recro and Baudax Bio.

We look forward to keeping you updated on our progress in the coming weeks. Thank you for your time and attention today. We'd now like to open the call for questions. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question comes from David Amsellem from Piper Jaffray. Your line is open.

David Amsellem

Thanks, and good morning. It has been three questions on IV meloxicam Gerri. First, can you just talk about process and where we go from here in terms of your process, timeline, and just help us understand the mechanics and logistics of this real softness? That's number one.

And the two, can you provide some more specifics on what kinds of data are you going to be providing and specifically remind us what were the issues that the division was hung up on and how you're planning to address that?

And then, lastly on the Baudax Bio business itself. To the extent you get approval are you going to commercialize the product with the sales force and what's your general vision for how you want to build the Acute Care? I know that's a lot but hope you can get on that. Thanks.

Gerri Henwood

No, I'm mad David.

David Amsellem

Thanks.

Gerri Henwood

Thanks Dave, I mean that's the History of the World Part I. I will be my do my best to address this.

David Amsellem

Which is a great movie, by the way, okay.

Gerri Henwood

Thank you. So happy news that we're also happy to talk about. So for IV meloxicam, the process has been that after the second CRL, we filed an appeal which is part of the dispute resolution process, and it was the first double appeal. Upon review by the old Director for that division, came back to us with a letter indicating that the appeal was granted, meaning, we were appealing the lack of approval of the product stating that we believe we had sufficient efficacy and safety.

And we believe our experts and talking to similarly interpreted her belief which she narrates in that very lengthy letter, that there was sufficient evidence that the product had safety and efficacy. But that there was a need to negotiate labeling with the division. So that's the process and the mechanics now would be that we are stepping out of that appeal resolution process, we believe as of now that there would not be a need to go to a further step because, the appeal was granted.

But we do need to re-file with proposed labeling and the varsity of the NDA goes with it. So that means we also deliver, have to provide safety update which we would not anticipate to be problematic because the pattern CDMOs through these studies of adverse events, to all our beliefs right now looks quite similar to what has been in the NDA.

But anyways, that will go together along with the labeling and as usual the annotation of where the support for those labeling statements could be found in the NDA. We have not really had labeling discussions with the division because of differences in their view of the entire filing. If we get to the more specifics part, we have discussed in the past with our shareholders and with you all as analysts that the two areas that Dr. Herbson, the division we're focused on was the time of launch that which is not as fast as opioid products.

And at the end of dosing that there is a chunk of patients who have a delimitation of efficacy with the last 20% to 25% of the dosing period. So, we believe that we will be focusing on ways that we can describe to prescribers, those effects. In some cases, we had thought that we had provided options that might have dealt with that before but did not get feedback on them, when the second CRL came out.

So, I would expect there will be some submission and hopefully some dialog around, how do we achieve, what the divisions mix is best and is clear for prescribers. We believe that, upon achievement of that goal the product would be approved. And that's our current belief and understanding.

So, then, okay, let's presume that we are fortunate enough to get to that stage. We believe that we have been preparing for commercialization of the product, before we were surprised with the CRL and then, the second CRL. We have not retained the bulk of the commercial stats, but we have a pretty special core commercial team who have been reducing their cost of the company by providing some consulting services that will pay to Recro, so that we can hang on to them through this period and keep up today with our commercial plans and what's going along changes in this market place.

So, we believe that is something that we will pursue. We are currently evaluating what does that look like. We recognize what is the challenging market place. But there is still a strong appetite and need for non-opioid options for management of payment in Acute Care setting. And we've talked in the past about the role that ASC's could play in early start program as well as at the hospitals themselves, which will take longer in terms of their formulary additions.

But that is the current plan. We continue to remain open to other options, but as of now that's where we're going. Is that helpful David?

David Amsellem

No, that's very helpful. I appreciate it. And just there's a follow up on process. Are you preparing for an add time? Do you think that's where we can go or is that because there's an appeal that was granted that's that not the direction in which we're heading?

Gerri Henwood

So, we believe based on what was in the letter and based on what our experts and regulatory council have told us that, if we can successfully negotiate labeling with the divisions, that there would not be an outcome.

David Amsellem

Okay, thanks Gerri.

Gerri Henwood

Thank you.

Operator

Thank you. Our next question comes from Esther Hong from Janney Montgomery. Your line is open.

Esther Hong

Hi, thanks for taking my question, and congratulations on the quarter. So, shifting to the CDMO business. Can you provide additional details behind what's driving the increase in guidance and then also, from the third quarter, what's the contribution from key products? Can you discuss the demand for that? And then how much of that is coming from new business contracts and what can we expect for new business contracts in 2020? Thanks.

Gerri Henwood

Thanks Esther. Again, I have to comment the comprehensive of your question. So we'll do our best to give you some clear answer. So, the increase in guidance has been driven by not only the stronger than expected performance in the third quarter, but as you know we look at guidance based on what we have is current customer order patterns and to some extent, the success of the new business initiatives that are also contributing.

But Ryan let me turn it over to you to give some more quantitative response.

Ryan Lake

Yeah. I mean through the first half of the year, we really saw our partners' marketing and distribution strategies really being successful and our new business efforts continuing to increase. One of our customers had implemented a new pricing strategy, which benefits us directly as a result of our profit sharing relationship. And they also deepened their distribution strategy with what we believe was some stocking at one of the largest generic sources in the U.S.

We also saw, capsule volumes to one of our customers in the first half of 2019 exceed all of their 2018 capsule volume. So we're really excited about the anticipated revenue growth in the trajectory really of around 30% this year. And with the long range forecast that we have from our customers, the current market conditions, and the prospects of the new business growth, we expect this continue to see that growth in 2020 and beyond.

The business is really strong. It is doing great. You saw earlier this year, we are able to walk into five and six year agreements with our major core commercial customers. We're also able to expand economically one of our agreements with another customer, because these are very important relationships with them, very sticky and I have to say that our new business development team, and the team down in Gainesville is doing a tremendous job.

The culture and the atmosphere of every one really pulling together to achieve the new direction and diversify our historic revenue streams, toward these new business whence we're seeing a lot of progress there. So it's really an exciting time for Recro, Esther.

Esther Hong

Great, thank you.

Gerri Henwood

Thanks Esther.

Operator

Thank you. Our next question comes from Leland Gershell from Oppenheimer. Your line is open.

Leland Gershell

Hey, good morning Gerri, thanks for taking my questions. Just wanted to drill a little bit further to the review process for IV meloxicam. Could you clarify to us as it moves forward with the FDA and the label negotiations are discussed, are those then still with the same division staff or is it a separate group? How should we kind of think about the personnel on the FDA side given that you've the two CRLs?

Gerri Henwood

Okay, thank you. So, we've been -- the letter from the Board reviewing appeal has referred us back to the division which would be dap and to Dr. Herbson's staff for the negotiation of the labeling. In that process, as we re-file we would anticipate, based again on the guidance that we've gotten from our experts that this should be labeling type review period which would normally be a two month PDUFA after filing of it. So that's the folks were talking to, and what we believe should be the general timeframe.

Leland Gershell

Okay, thanks. And then just one question on the CDMO. So with you and the other members of the Recro leadership team moving over to Baudax, maybe if you comment on what the leadership of the CDMO company will be going forward and any involvement that you and others who are familiar with may have in revs as it separates from Baudax?

Gerri Henwood

Sure. So the great news is we have a very terrific team acting, who have been doing things that from my past experience and this kind of space I would say the team is quite exceptional. They have not only continued to grow and improve our ability to deliver on time and full for our commercial customers in a great quality environment.

But, the management team particularly Scott Rizzo has done a really fine job of fostering, developing and collaborating with business development to grow and outreach functions that adds to the client base and brings in new customers with complex filtering problems, that we get a chance to develop solutions for them and potentially through that to improve the long term prospects for the company even further.

And at the same time fostering results the new facility that we have for both development services and high potency development services currently. They will not have the opportunity as of yet as anticipated to run the business without some tackling from Ryan and I because as you know, we've been handling both sides of this equation to-date. And the plan is certainly for the first 12 months after the spin, but we will continue to be involved for public company interface and as corporate over side and strategic resource to the business unit at the CDMO.

We will be trying to enhance Scott's visibility to the Street and what people have more opportunity to get to see him along with us and get him some more exposure in that regard. But that's the plan as we embark on the process.

Leland Gershell

And then with the NDA expectation that overtime they kind of public company leadership maybe installed into place to work with Scott or is it too early to comment on how that will look down the road?

Gerri Henwood

Yeah, I mean, I would say it's just a little bit early only because Scott hasn't had that fun that we all had together collaborating with analysts and investors. And so we want an opportunity for him to introduce for that and for him to decide whether that's something that he would enjoy or sees himself wanting to be in the future. But certainly, we're doing this plenty of times for that assessment and to provide continuity of leadership, but wouldn't anticipate any abrupt changes.

And we certainly have had exposure to the Street before something like that would happen.

Leland Gershell

Okay, great. Your commentary is much appreciated, thanks very much.

Gerri Henwood

Thanks very much Leland.

Operator

Thank you. And our next question comes from Patrick Trucchio from Berenberg Capital. Your line is open.

Iris Long

Hi, good morning this is Iris on for Patrick. Just a few question on the CDMOs. So first where this capacity for the CDMO facility today? And by how much could utilization realistically be expanded over the next few years?

And then on the CDMO fundamentals. We think that is trending far better than what we think some might have expected a few years ago. So, how should we think about the growth trajectory of the business over the long term? And particularly, what possibilities are there from a business development perspectives?

Gerri Henwood

So, I'll give some qualitative and then we'll come back to capacity and Ryan can comment on that as a part of the growth. But as we think about this business at the time that we had a good fortune to acquire this from Alkemes. The business was in a different setting and its customer base was somewhat different, remembering that the sustain release verapamil capsule business had transitioned from Watson to Actavis.

And we were fortunate that as of April of 2015, that began a further expansion as Actavis increased the distribution network for that product through their strength being somewhat larger and better is that even than Watson. And then, just a few years ago, Teva having acquired Actavis further expanded that distribution network. Much as the Lannett business now acquired from Kremers Urban as Lannett bought that business has also benefited from additional distribution strategy and expansion.

So, we've been happy to have -- fortunate to we have partners who were growing and expanding their network and appetite for the product. In addition to that, we have seen a very stable business in the ADHD side, with Novartis for instance Focalin. Even after that went generic, partially in 2015 and completely in 2017, between Novartis and Sandoz division, for whom we manufactured the product. Our product has hung in there and been quite sticky.

We think part of that is that class of the agents, clinicians penetrating patients up to those extended release doses also require the considerable period of time. And so they tend not to make abrupt changes for those patients. We look at the real inside of it. A similar kind of situation rolled into our patent for long time in the U.S. But has continues to have some appetite for the product in U.S. and has had a bigger appetite in Europe and number of other countries that have never had patent coverage.

So, we anticipate that product will continue to have, we think a similarly sticky pattern, again partially because it's therapeutic area, partially because of the strength and prominence of Novartis and Sandoz. So, we already described a stable and then portions growing this business but we will continue to believe we'll be very contributory for the future.

We are looking for new business to contribute significant growth over the coming years. And that starts with typically smaller projects but if we execute successfully that client expands and extends that work. And so that will be a natural part of the growth as well as continuing to the expansion of the business development function which Scott and his team have done nicely and will continue to do.

So we would see continued expanding growth demand for the development facility for the early stage high potency work and then an evolution to migration for a number of those projects to commercial side. And potentially for the high potency side to commercial side as well. But, Ryan do you want to talk a little bit about why we're doing better than one might have expected right now?

Ryan Lake

Yeah. I mean, I think if you were to look historically since we owned this business. I mean we've been able to achieve that of mid-teen CAGR growth. In terms of revenue growth we are on track for 30%. This year which is significant and quite deliberately over the past several years, we have continued to invest in scale to support the vision and growth that we have for new business and diversifying away from our existing commercial customers.

I mean, over the past 12 months I think we've invested about $10 million in CapEx growth to support that new business growth. So we're just starting to see the fruits of that labor and we're in a unique position because we have industry leading margins. We're close to 50% EBITDA margins for this year. And because all of our costs are fully absorbed, we really have the opportunity to look across the full spectrum.

Because you can start with and stay with Recro from IND to commercialization that allows us the unique opportunity to look at tech transfer opportunities as well as opportunities with customers, whether starting early with us. We're able to solve those complex tricky formulation and development problems that enable us to generate higher margins in addition to being able to leverage our already existing fully absorbed overhead.

In the main facility, we're about two-thirds capacity on about one shift. So there's significant capacity to run additional shifts in that main plan. And then as a reminder, we did last fall opened up the RGT facility as well, which has plenty of capacity left for the new business development efforts that we have to be able to continue to further leverage, the outstanding EBITDA margins that we have in this business.

Iris Long

Thank you.

Gerri Henwood

Thanks Iris.

Operator

Thank you. And I am showing no further questions from our phone lines. And I'd like to turn the conference back over to Gerri Henwood for any closing remarks.

Gerri Henwood

Thanks operator. Thank you all for joining us here this morning. We're very pleased to bring the update on Recro and on IV meloxicam. Hope you'll have a very good day. Take care, bye.

Operator

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

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