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Another Promising ~$7 Biopharma Stock That Merits Investment Consideration

|Includes: Recro Pharma Inc (REPH)

"I don't know how people live without coffee, I really don't." - Martha Quinn

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Yesterday, we profiled Invitae (NYSE:NVTA) as an attractive genetic testing concerned that is selling for just over $7.00 a share. Keeping in that Venti Mocha Frappuccino with soy milk and a triple shot of espresso price category....Today, we look at a ~$7 biopharma concern that has an attractive risk/reward profile and a name I recently took a small stake in.

Company Overview:

Recro Pharma is a small Pennsylvania based biopharma focusing on developing non-opioid products for the treatment of acute pain, a very popular space these days. This concern came public in early 2014 and after a big spike in 2015 is trading pretty close to its IPO debut at just under $7 a share. The stock's 52-week high is $12.50 and it currently sports a market capitalization of approximately $80 million.

Pipeline:

The company has three primary drug candidates in development, the most important is an IV version of Meloxicam which is in late stage testing for acute post-operative pain.

Meloxicam

This compound has been around since the 90s. This drug is a long-acting NSAID with preferential COX-2 inhibition that possesses anti-inflammatory, analgesic, and antipyretic activities. Unfortunately, in its oral form it takes 5-6 hours to take full effect. Recro has developed a proprietary injectable form of the drug which is in late stage testing using an IV version and earlier stage testing for intramuscular delivery. The benefits of Recro's version of Meloxicam is it is much faster acting than the oral version and should find a ready market if approved, which seems likely given trial results to this point. The company is targeting mid-summer of 2017 for filing a NDA for its IV version of Meloxicam.

Dexmedetomidine

The company is using the same approach to develop an IV version of Dexmedetomidine, which is another pain management compound that has been around since the 90s and is marketed under the brand name Precedex® which had approximately $275 million in gross sales in 2015.

Dexmedetomidine has an extensive history of intravenous use in acute and surgical settings, utilizing its sedative properties. Recro have formulated their version of Dexmedetomidine at an eighth or a tenth of the dose in the currently recommended IV dosage levels. Based upon our lower dose, the company has seen very little sedation, to date, in their clinical trials while still demonstrating an analgesic effect. The compound is in early & mid-stage testing for several pain indications such as Peri-procedural pain.

Fadolmidine

This is a similar compound to Dexmedetomidine but does not cross the blood/brain barrier. This accounts for the targeting of Fadolmidine use for either intrathecal administration for pain or anesthesia, or potentially for topical use to treat pain associated with regional nerve pain from underlying nerve damage, also called "neuropathies. A Phase II clinical trial successfully demonstrated that intrathecal Fadolmidine, in combination with bupivacaine, produced analgesic effects compared to bupivacaine alone in bunionectomy patients. The intrathecal version of Fadolmidine is in mid-stage testing while the topical version is in early clinical testing.

Recro Pharma also has a manufacturing business which it purchased in 2015 that produced some $52 million in revenues through the first three quarters of 2016. This business consists of a 97,000-square foot, DEA-licensed facility that manufactures five commercial products and receives manufacturing revenues and royalties associated with the sales of these products. Revenues are only slightly growing for this side of the business (up 2.5% Y/Y) currently and the company posted a loss of $5.4 million in the third quarter due to the costs of trial development and interest costs ($1.5 million a quarter) associated with debt taken on for the facility.

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Position Open Date Closing Date Entry Price Closing Price Loss/Gain
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Analyst Commentary & Balance Sheet:

The company just raised some $40 million through a secondary offering that will go to cover the costs of its NDA and preparations for commercial activities for IV meloxicam and the planned Phase 3b program as well as general corporate purposes. Combined with the cash on hand on at the end of the third quarter, the company has over $60 million of cash on the books and currently has solid financial flexibility. If IV meloxicam is approved as expected, the company will owe Alkermes (NASDAQ:ALKS) a tidy milestone payment in connection with its purchase of the rights to IV meloxicam as well as the company's manufacturing facility in March of 2015.

Analyst support is strong, but must be tempered somewhat given the company just raised capital via the secondary markets. The median analyst price target on Recro currently is just north of $22 a share. At the end of November, Aegis Capital, H.C. Wainwright and Roth Capital all reiterated the shares as a Buy on the same day. Price targets proffered ranged from $19 at Wainwright to $25 at Aegis.

Roth's analyst in reissuing his Buy rating and $24 price target stated the following on Recro Pharma and its prospects "We reiterate our Buy rating as we believe that IV meloxicam is approvable and could represent an alternative to opioid pain medications. REPH reports second positive efficacy trial for IV meloxicam. Recro Pharma announced positive results from its second phase 3 clinical trial evaluating intravenous (IV) meloxicam for the treatment of acute post-operative pain following abdominoplasty surgery. IV meloxicam achieved its primary endpoint of a statistically significant difference in Summed Pain Intensity Difference {SPID} over the first 24 hours (p=0.0145). Data analysis. The study also achieved statistical significance for 10 of the 19 secondary endpoints with pain relief as early as SPID12 (SPID6 did work in the first trial, SPID48 achieved significance in both trials). Even the missed secondary endpoints appeared to trend in the right direction. Takeaway #1 - Road to market becoming clear. This was the second pivotal efficacy trial and the last remaining high risk event for investors, in our opinion. The gating factor to filing a New Drug Application (NDA), however, remains the long-term safety study (which should complete enrollment in late 1Q17/early 2Q17). We do not expect surprises in the long-term safety study given that the adverse event profile appears safe in the efficacy trials. Takeaway #2 - Filing target remains "summer 2017″. Piper Jaffray was the last analyst firm to way on Recro when it initiated the shares as a Buy with a $12 price target on December 19th.

Outlook:

It should be noted there was some small stock purchases by several officers in the company this May. In addition, a beneficial owner increased his stake in Recro by some 15% or added almost $3 million in new shares in August; an impressive vote of confidence. IV Meloxicam seems on its way to approval and commercialization and should represent an important new revenue stream for the company. Recro Pharma has the "shots on goals" I like to see before taking a stake in a promising developmental concern. It also has a manufacturing facility already in place, which is a rarity in this space.

Upcoming catalysts in 2017 could boost sentiment on the stock and increasing positive commentary on the concern from analysts could trigger this as well. I offer up Recro for consideration within a well-diversified biotech portfolio.

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Note: Three members of the SeekingAlpha community thought it was "unfair" to close out our Biotech Forum Holiday special promotion on a non-trading day. Therefore, we are extending this offer by one day. If Recro is the sort of stock that interests you as an investor, we are giving out free two-week trials to The Biotech Forum through midnight tonight as we wind down our Christmas Day promotion.

Thank You & Happy Hunting

Bret Jensen

Founder, Biotech Forum & Insiders Forum

Disclosure: I am/we are long REPH.