Q3 2019 Earnings Call

Ladies and gentlemen, please standby your conference call beginning approximately two minutes. Thank you for your patience and please standby.

This time, all participants are in listen only mode.

Later, we'll conduct a question and answer session and instructions will be given at that time.

If anyone should require any further assistance. Please press star then zero on your Touchtone telephone.

As a reminder, this conference is being recorded at the company's request I would now like to turn the call over the Claudio stifling or Investor Relations you may begin.

Good morning, and thank you for joining us on today's conference call to discuss recruits third quarter 2019 financial result.

This is Claudius Eisner and I'm joined today by Gerri, Henwood, President and Chief Executive Officer, and Ryan like Chief Financial Officer.

Following prepared remarks today by Jerry and Ryan We will open the call for questions earlier. This morning, we issued a press release detailing our financial operating results for the three and nine months ended Septemberthirty 2018. The press releases are available on the news investors page of our website at Recro pharma Dot com.

Before we begin our formal comments I'll remind you that bears remarks, we make today constitute forward looking statements pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act.

And then he thought.

Including the company's ability to complete the span of its acute care business segment.

Uncertainty of whether the anticipated benefits of itself can be achieved risk of unexpected costs or delays on the company's ability to complete the spend all the company's ability to continue the development and commercialization of I'd be meloxicam, the company's ability to execute strategic initiative the company.

The ability to adequately resolved the outstanding labeling issues with Sta for I'd be more toxic him and the timeframe associated with any such resolution the companys financial outlook and the company's product development plans for other product candidates, including the result, and timing of any future preclinical studies in 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 port.

And can be identified by words, such as excess land will marry anticipated believe estimate upcoming should intend in other words of similar meeting.

Any such forward looking statements are not guarantees of future performance and involve certain risks and uncertainties. These risks are described risks factors in the management's discussion and analysis, a financial condition and results of operations sections of Recro pharma in a report on Form 10-K for the fiscal year ended.

December 31, 2018 in quarterly reports on Form 10-Q , which are on file with the Securities and Exchange Commission and available on that.

Right.

Any information we provide on this conference call is provided only as of today up this call November eight.

<unk> team and we undertake no obligation to update any forward looking statements. We knew we may make on this call on account of new information future events or otherwise.

In addition, any unaudited pro forma financial information that may be provided its preliminary and does not support to project financial positions are 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 in nine months ended Septemberthirty 2019.

Typically we may discuss operating income as adjusted which is operating income without the impact of A.S. Yoo number 201 poor dash your nine in the earnings before interest taxes, depreciation and amortization and noncash stock based compensation, where EBITDA as adjusted for our contract development.

And then you saturate Ortez organization or CDMO business.

We believe these non-GAAP financial measures are helpful. In understanding a CDMO business as it gets investors greater transparency into the supplemental information by management and evaluating the financial performance of our lives it might be.

These non-GAAP financial measures should be considered an 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 EBITDA as adjusted to the GAAP measures.

The middle financial schedule, which has been made available on the news and investors teach our website at Recro pharma Dot Com I would now like to turn the call to Jerry what Jerry.

Thank you quality and good morning, everyone.

Thank you for joining us on today's call.

I'll begin today when the never view of recent accomplishments within the CDMO segment.

I'm pleased to announce at the manufacturing business continues to outperform generating record results.

Third quarter revenues of 25.3 million represents a 30% increase compared to the third quarter of 2018.

Year to date, the CDMO business generated $81.6 million in revenues.

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 fruit.

Given the consistent strong result organic growth from existing customers.

Development services customers and new business prospects, we're raising our 2019 full year CDMO revenue guidance from $91 million to $94 million.

And anticipated $90 million to $100 million.

I'm also happy to announce it during the third quarter of 29 team.

We cheap consolidated operating profitability earlier than expected and generated $4.8 million in cash from operation.

We expect to remain cash flow positive for the second half of 2019, excluding the impact from any potential strategic transaction.

Turning now to be to care segment.

Well I mean meloxicam as many of you know the U.S. food and drug administration recently granted our appeal.

The complete response letter relating to our new drug application seeking approval for I'd be more so can we.

We're in the process of preparing a comprehensive response and Refiling. Then includes proposed revised labeling and certain other information to the FDA.

Finally earlier this month, our board of directors approved the plan spin out of acute care business segment, which will be known as bought back bio and.

And declared a special dividend distribution.

All outstanding shares bought back five common stock.

For every 2.5 shares of Recro common stock held a record as at the close of business on November 15, 2019 recruit shareholders will receive one chair of Florida bio common stock.

Shareholders will receive cash in lieu of any fractional shares.

Vessels dividend distribution is expected to be paid November 21st 2019.

The distribution of bought acts by a common stock will complete the separation of the acute care business segment from recruit.

After the separation bought acts by a will be an independent publicly traded company focused on developing and commercializing innovative products for hospital unrelated acute care settings, and recruit will retain no ownership interests.

A lot ex bio has applied for listing of its common stock on the NASDAQ capital markets.

Under the ticker symbol be X or.

No action is required by regrow shareholders to receive shares at Boardex bio common stock as a part of the special dividend distribution.

However, if any holder of Recro common stock sell shares of regrow common stock on or before the distribution date, they may be selling the entitlement to receive shares the product bio common stock.

With that I'll turn it over right now.

Thank you Jerry good morning, everyone.

Since we issued a press release in our Form 10-Q earlier today outlining our full financial results or just review some of the key third quarter and year to date highlights as of September Thirtyth 2019, recur had cash and cash equivalents of 37.9 million revenues and cost of sales were 25.

<unk> 3 million, an 11 million respectively for the third quarter 2019, compared to 18 point Threemillion and 8.5 million for the third quarter of 2018.

Increase of 7 million in revenue was due to increased royalties recognize 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 servicing 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 2019 on 1.8 million compared to 11.3 million for the third quarter 2018 decrease of nine and a half million was primarily due to the decrease in pre commercialization manufacturing cost Friday meloxicam shifted focus.

Our CDMO formulation and development capabilities to cost 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 2018.

<unk> third quarter 2019, the company reported a net loss of 4.3 million.

[noise] or 19 cents per share compared to a net loss of 13.3 million or 64 cents per share for the same period in 2018.

For the nine months ended September Thirtyth, 2019 revenues and cost of sales were 81.6 million.

39.5 million, respectively, compared to 59.6 million and 31 million for the same period in 2018.

The increase at 22 million in revenues 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 servicing development capabilities as well as growth in manufacturing demand, which again was partially offset by operating efficiencies gained as a result, a higher production volumes.

Research and development expenses for the nine months ended September Thirtyth 2019 were 18.6 million compared to 29.9 million for the same period in 2018, excluding 2.8 million a costs associated with the strategic restructuring and it's usually a recorded in nine months right.

For Thirtyth 2019, the decrease a 14.1 million was primarily due to a decrease in pre commercialization manufacturing cost Friday Meloxicam, a decrease in personnel costs and the shift the focus of our CDMO formulation and development capabilities to cost to sales activities.

Research and development cost for other pipeline products.

General and administrative expenses for the nine months ended September Thirtyth 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 a nine months ended September Thirtyth 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 IP blocks of Cam.

Following the receipt of the second CRL.

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 the dressing the first and second C or else issued by the FDA regarding R&D a for Ivy.

Meloxicam.

For the nine months ended September Thirtyth 2019, regrow reported a net loss of 9.1 million were 41 cents per share compared to a net loss of 38.4 million or $1.91 per share for the comparable period in 2018.

As Jerry mentioned earlier, we are increasing our revenue guidance for 2019 for 91 to 94 million to an anticipated 98 to 100 million. We're also increasing our CDMO operating income from 35 to 39 million to 40 to 44 million and Cds.

EBITDA as adjusted from 44 to 46 million to 48 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 re grows experience with customers product market estimations.

I'll now turn the call back to Jerry for closing remarks, Jerry I try and clothing. We're pleased with the continued success of our CDMO segment in 29 team. We look forward to continuing our progress moving towards FCC approval. The I'd be more Kim India. We also remain on track to execute the spin out looking.

Do you care business segment during the fourth quarter.

The result of which will be two independent publicly traded company.

The CRO and bought back bio we look forward to keeping you updated on our progress in the coming week.

Thank you for your time attention today, we'd now like to open the call for questions operator.

Thank you ladies and gentlemen, if you have a question at this time. Please press the star followed by the number one key on your Touchtone telephone. If your question has been answered or are you wish or move yourself from the Q. Please press the pound key once again ask a question. Please press Star then one now.

And our first question comes from David Amsellem from Piper Jaffray. Your line is open [noise].

Thanks.

Good morning.

Scans on.

The Meloxicam Jerry first can you just talked about process and then a wherever we go from here in terms of.

You know your process timeline, and and just help us understand.

The mechanics, and logistics loans <unk> VCM process. That's number one number two can you can buy it's more specifics on.

What kind of.

Data, you're going to be combining and specifically what remind us what appeared this the issues that.

The decision loosening up on.

And how you plan to address that.

And then lastly on the the bought ex file business itself to the extent you.

Approval that are you going is commercialized.

The product mix <unk> sales force and you know what's your general vision for you know how you want to go.

You can't business Oh, that's a lot.

Other than that David [laughter]. Thanks, Thanks, David I mean, that's like the history of the World part was [laughter], we'll see went back to be addressed what [laughter], which is which is a great movie by the way. Okay. [laughter]. Thank you. So you know happy news that we're we're also have begun.

Okay. So for for I'd be more sand.

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 level appeal.

Hi can review by the.

Oh, good 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 we believe in our experts in talking to us. So similarly interpreted her belief would see enumerates and that's 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 that's the process in the mechanics now would be that we're stepping out of that appeal resolution process. We believe as of now that you would not be need to go to a further step because the.

People was granted but we do need to refile with propose labeling and the rest of the N. Diego's with it. So that means you also did ruger have to provide a safety update which we would not anticipate to.

To be problematic because the pattern seen in those three be studies of adverse events.

To all our beliefs right now looks quite similar to what has been in India, but anyway that will go together along with the labeling and as usual the annotation of where the support for this liebling statements could be found in the San Diego.

We have not really had labeling discussions with the division because of differences in their.

View of the end of the entire filing.

We get to the more specifics part we have discussed in the past with our shareholders and with fuel as analysts that the two areas that.

Dr Hertz and the division were focused on was the time of onset.

Which is not as fast as opioid products and.

At the end of dosing that there is a chunk of patients who have a diminishing of efficacy in like 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.

Provide options that might have dealt with that before but did not get feedback on then when the seconds here all came out so I would expect there will be some.

Submission and some hopefully some dialogue around how do we chief what's the division thinks is bad.

This clear for prescribers.

We believe that upon achievement of that goal the product would be approved and that's our current beliefs and understanding.

On the then okay, let's.

I presume.

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 second CRL, a we have not retains the bulk of the commercial staff, but.

We have a pretty special core commercial team, who have been reducing their costs to the company by providing some consulting services that were paid to recro. So that we can hang on to them through this period and keep up to date with our commercial plan.

And what's going on changes in this marketplace. So we believe that is something that we will pursue we are currently evaluating what does that look like a we recognize what is a challenging marketplace, but believe there is still strong appetite and need for non opioid.

Options for management of pain, and then acute care setting and we've talked in the past about the role that A.S. fees could play in early start program as well as a the hospitals themselves, which will take longer in terms of their formulary additions, but that that is the current plan we continue to.

We remain open to other options, but as of now that's that's where we're going is that helpful. There.

[laughter] Oh, that's very helpful. I appreciate it and this was a follow up on on process are you.

Hearing flooring and Tom do you think that's where we can go or was.

There is an appeal that was granted.

That's that's not the direction in which we're heading.

So we believe based on what was in the ladder and based on what our experts and regulatory counsel have told us that.

If we can successfully negotiate labeling with it division that there would not be and I'd come.

[laughter] Thanks Gerry.

Thank you.

Thank you.

Next question comes from Mr., Hong from Janney Montgomery Your line is open.

[noise] hi, Thanks for taking my question and congratulations on the corridor, so shifting to the CDMO business do you can you provide additional details behind what's driving the increase in guidance and then also.

Third quarter, what's the contribution from key products.

Can you discuss the did 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 and 2020. Thanks.

Thanks system again I have to commend the comprehensive so your question. So we will do a basket to give you some clear answers so.

The increasing 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 this current customer order pattern.

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.

Yeah, I mean, so you know through the first half of the year, we really saw US you know our partners marketing and distribution strategy is really being successful and our new business efforts continuing to increase one of our customers had implemented a new pricing strategy, which benefits us drew.

Lastly, as a result of our profit sharing relationship and they also deep and their distribution strategy with what we believe was some stocking at one of the largest generic sourcers in the U.S.. We also saw capsule volume.

To one of our customers in the first half the 2019 exceed all of their 2018 capsule volume. So we're really excited about the anticipated revenue growth in the trajectory you know really of around 30%. This year and you know with the long range forecast that we have.

From our customers the current market conditions, and you know the prospects of the new business growth. You know we expect this continue to see that growth in 2020 and beyond.

The business is really strong it's doing great. You saw earlier this year, we're 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 on another customer because these are very important relationships with them very sticky and I have to say that you know our new business development team and the team down in Gainesville is doing a tremendous job you know the.

The culture in the atmosphere of everyone really pulling together to achieve.

The new direction and diversify our historic revenue streams toward these new business wins, we're we're seeing a lot of progress there. So it's really an exciting time for re grow faster.

Great. Thank you.

Thanks [laughter].

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

Hey, good morning jury thanks for taking my questions I'm, just want to drill little bit further into the the review process for.

Thanks, Kim <unk>.

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 stuff or is it a separate.

Group.

How should we think about the personnel on the FDA side.

<unk> three of the two CRL.

Okay. Thank you who we've been.

The letter from the.

Oh, good reviewing a appeal officer has referred us back to the division, which would be death and on to Dr. Hertz and staff for the negotiation of the labeling.

In in that process, Lou and as we re file a we would anticipate.

Based again on the guidance, we've gotten from our expert that this should be.

Labeling type review period, which would normally be a two month could do for after filing of it. So that's.

That's the folks were talking to and what we believe should be the general timeframe.

Okay. Thanks, and then just one question on the CDMO.

Side with with you and the other members of the real leadership team moving over to Turbotax, maybe you could comment on.

What the leadership of the.

The CDMO company will be going forward in any involvement that you and others, who are familiar with may have in RIS as it separates from politics.

Sure. So the great news is we have a very terrific team at Gainesville, who has been doing.

Things that.

From my past experience in this kind of space I would say the team is quite exceptional they have not only continue to.

Grow and improve our ability to deliver on time and full for our commercial customers and it's great quality environment, but the management team, particularly Scott Reserve has done a really fine job of fostering developing and collaborating with business to.

Okay, and then to grow up and outreach function that adds to the client base and brings in.

New customers with complex goes for him problems that we get a chance to.

Develop solutions for for them and potentially through that too and improve the long term prospects for the company even further.

And at the same time foster and developed a new facilities 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 pet going 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 that we would continue to be involved for a public company interface and you know as a as.

Corporate oversight and strategic resource to the business unit at the CDMO, we will be trying to enhance Scott.

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 that's the plan as we embark on the process.

With.

There then be any expectation that over time.

A.

Kind of public company leadership may be installed into place to work with Scott or is it too early to comment on how that will look down the road yeah, I mean, I would say it it's just a little bit early only because sky hasn't had the fund that we have all had taken together collaborating with analysts and investors and so we wanted it up.

And that he for him to be introduced to that for him to decide whether that's something that he.

Would enjoy or sees himself wanting to do in the future, but certainly we believe there's plenty of time for that assessment and to provide continuity of leadership, we wouldn't anticipate any abrupt changes and we certainly have had exposure to the street before something like that would happen.

Okay, Great your commentary as much appreciated thanks very much.

Thanks, very much will.

Thank you.

Next question comes from Patrick Truckee from Berenberg Capital Your line is open.

Hi, good morning desires on for Patrick I'm, just a few question onto CTM, most suffers where this capacity for the CDMO facilities, Dan today and by how much could utilize Asia 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 to growth trajectory of the business over the long term and particularly what possibilities I guess from business development perspective.

So oh, there's some qualitative and then we'll come back to capacity and Ryan can comment on that as a part of the growth but.

We think about this business as the time that we had the good fortune to acquire this from ALC Hermes.

The business was in a different setting and its customer base was somewhat different remembering that this sustained release for rapid though capsule business had transitioned from Watson to activists and we were fortunate that as of April of 2015 that begin.

And a further expansion as activists increasing distribution network for that product through their strength being somewhat larger and better at that even then Watson and then just a few years ago to have a having acquired activists further extended that distribution network much as the.

The net business now the acquired from Kremers urban as one that bought that business has also benefited from additional distribution strategy and expansion. So we have been happy to have a good fortune have partners, who were growing expanding their networking appetite for the product.

In addition to that we have seen very stable business in the age T. side with Novartis Novartis for a for instance for focal and even after that went generic and partially in 2015 and completely in 27 team between Novartis and.

Endo Division for whom we manufacture the product that product has hung in there and been quite sticky. We take part of that is that class of age and clinicians tight trading patients up to those.

Extended release doses often requires a considerable period of time and so they tend not to make abrupt changes for those patients we look at the rental inside of it.

Similar kind of situation really felt patent for a long time in the U.S., but has continues to have some appetite for the product in the U.S. and has had a bigger appetite in Europe and number of other countries I have never had patent coverage. So we anticipate that products will continue to her.

Yes.

We think is similarly sticky pattern again, partially because its therapeutic area, a partially because of the strength and prominence of Novartis and sandow.

So very what I would describe a stable and portions growing base business. We would continue to believe will be very contributory for the future.

We are looking for new business to contribute significant growth over the coming years and in that starts with typically smaller project, but if we execute successfully backplane expands and extends that work.

And so that will be a natural part of the growth as well is continuing to the expansion of the business development function, which Scott and his team have done nicely and we will continue to do that we would see continued expanded group demand for the development facility for the early stage high potency.

And then an evolution to migration for a number this product commercial side.

And potentially for the high potency side to commercial side as well, but why do you want to talk a little bit about you know why we're doing better than one might have expected right now.

Yeah, I mean, I think if you were to look historically since we own this business I mean, we've been able to achieve kind of mid.

Turning CAGR growth in terms of revenue growth, we're on track for 30%.

This year, which is significant and quite deliberately over the past several years, we've 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.

Last 12 months I think we've invested about 10 million in capex growth to support that new business growth. So you know, we're just starting to see you know the fruits of that labor and we're in a unique position because we have an industry leading margins were close to fit.

The percent EBITDA margins, a fruit for this year and because all of our costs are fully absorb we really have the opportunity to look across the full spectrum. Because you can start with and stay with re grow from from I.. Indeed, a commercialization it allows us the unique opportunity.

Look at tech transfer opportunities as well as opportunities with customers, where they are starting earlier with us where we're able to solve those complex tricky formulation and development problems that will enable us to generate higher margins. In addition to being able to leverage our already.

The existing a fully absorbed overhead and the main facility were about two thirds capacity on about one shift so there's significant capacity to run additional shifts in that main plant and then as a reminder, we did last fall open up the RG D.

Facility as well, which has plenty of capacity left for the new business development efforts that that we have to be able to continue to further leverage.

The outstanding EBITDA margins that we have in this business.

Thank you.

Thanks, sorry.

Thank you and I am showing no further questions from our phone lines I don't want to turn the conference back over to Gerri henwood for any closing remarks.

Thanks, operator, thank you all for joining US here. This morning, I'm very pleased so bringing the update on Recro and on I'd be Meloxicam hope you'll have a very good day take care bye.

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