Q2 2020 Recro Pharma Inc Earnings Call

August 10, 2020

Ladies and gentlemen, please stand by your rent growth 2022nd quarter conference call well begin momentarily.

Ken Please stand by your call will begin in two minutes. Thank you.

[music].

At this time, all participants are in listen only mode.

Peter We will conduct a question and answer session and instructions will be given at that time.

As a reminder, this conference is being recorded at the company's request.

I would now like to turn the call over to Claudia spikes Linger Investor Relations you may begin.

Good morning, and thank you for joining us on today's conference call to discuss recruit second quarter 2020 financial results.

How do you stay Springer 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 in 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 six months ended June 30 2020.

The press releases are available on the investors page of our website at www dot recruits CDMO dot com.

Before we begin our formal comments I'll remind you the various remarks, we make today constitute forward looking statements pursuant to the safe Harbor provision as a private Securities Litigation Reform Act of 1995.

Any statements related to our financial outlook. 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 clan will may anticipate believe estimate upcoming should intend in other words of.

Similar meaning.

The following are some of the factors that could cause our actual results to differ materially from those expressed and or underlying our forward looking statements customers changing inventory requirements and manufacturing plans customer decision to move forward with our manufacturing services.

Average profitability or many other products, we manufacture or customers facing increasing or new competition. This list of important factors is not all inclusive.

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, a financial condition and results of operations sections of recruit Gainesville, and your report on form 10-K for the fiscal year ended December.

31, 2019, and any quarterly reports on form 10-Q, which are on file with the Securities and Exchange Commission and available on that she sees website.

Any information we provide on this conference call is provided only as of today on this call August 10, 2020, 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.

Actual results may differ materially.

We may also discuss certain non-GAAP financial measures with respect to our financial performance for the second quarter 2020.

Specifically, we may discuss the operating income or loss as adjusted or the earnings before interest taxes, depreciation and amortization or EBITDA as adjusted historical CDMO. Once you exclude a public company cost or is it all as adjusted Standalone, which public company cost.

We believe these non-GAAP financial measures are helpful in understanding our business as they give investors greater transparency into the supplemental information used by management and evaluating the financial performance of our business.

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 these non-GAAP financial measures to GAAP measures and the earnings press release.

Now I'd like to turn the call a very to Gerri henwood Jerry.

I can't quality and good morning, everyone.

We hope those joining us today of keeping safe and healthy is we will continue to navigate through the ongoing global covert 19th pandemic.

I think cobot 19 situation continues to evolve we have implemented new ways of working and our primary concern remains to health and safety of our associates are customers and the patients treated with the products, we manufacture as well as for our shareholders.

I'd like to take a moment to discuss some of the challenges from the quarter.

Covert 19 pandemic continues to have certain adverse effects on both the U.S. and world economies, including the commercial activities of our customers and peers.

Looking ahead over the next few quarters, we expect a pandemic to continue to have some impact on our customers and the therapeutic categories. They serve.

We expect some continued volatility in our customer sales and inventory levels as they adjust to uncertainties surrounding the pandemic, including a potential for fewer patient visits to doctors offices access to help tele health as a result reduction in new and refill prescription rate.

Given the continuing uncertainty of the impact of a pandemic on our business and operations. We believe it is prudent to withdraw suspend our 2020 financial guidance as Ryan will confirm later.

I refer you to the two slides of the recently issued third party market data, which surveys the impact seen across many therapeutic areas, including a 15% decline in refill rates for cardiovascular medication.

At a 41% decline in pediatric medications to name a few.

These slides are attached as an exhibit to the Recro second quarter earnings release 8-K filed this morning and can also be found on the Investor section of our website under presentation.

As a result recruits business. Some results of operations have been adversely affected in ways that were not anticipated when the first quarter was reported.

The consequences to commercial work were seen in terms of manufacturing volumes and certain profit sharing result, even.

Even while maintaining market share such as for Tevas for rapid mill your business.

We believe this is due to reduced total prescription rates for many chronic therapeutic including verapamil.

Certain development <unk> customers continue to revisit their product development priorities, where the timing of services due to the impacts of cobot 19 on their potential financing timing of trials changes in staffing et cetera. As a result, we have seen the lead new business project starts.

We believe in the intrinsic merits of the commercial products, we manufacture for our customers as solid therapeutic and that there will be stabilization and eventual return to more regular habits of prescription filling and patient compliance with these products as we adjust to.

Life with a pandemic backdrop.

We believe that the new business initiatives, we have undertaken including a new tech transfer project with a major non U.S. firm for a marketed product as well as the addition of CTM services will continue to build over 2020 m. beyond.

However, we will continue to monitor the situation closely at our actively looking for ways to reduce costs and conserve operational resources.

During the second quarter as a pandemic continued to have an adverse effect on revenues.

We generated 15.5 million for the quarter.

Spike despite kobin 19 or operations remain stable and we successfully launched our new CTM business and secured multiple new customers.

For the newly launched CTM business, we are proactively responding to what we saw as an opportunity in the large and growing logistics business that is being driven by the need for on demand services from small medium and large pharmaceutical company.

This includes the ability to fulfill product clinical trial material orders for cutting aid edge clinical trial design.

For most clinical trial being conducted in the backdrop of the Cobot 19 pandemic sponsors are trying to keep patients safe in their homes, and olive clinics and hospitals, where they could be more vulnerable to capturing the virus. So CTM service offerings are also attractive to customers because of direct to patient.

Logistics.

In response to these key emerging customer needs.

And utilizing our regulatory analytics and logistics expertise, our new CTM business includes a fully integrated service offering from non clinical formulation apiay characterization manufacturing.

Clinical trial material manufacturing, including over encapsulation and double blind packaging.

We also provide stability testing as well as packaging services and direct to patient shipping should the trials ultimately be successful. We're also able to offer commercial pocketing services.

Another business segment I'd like to highlight is our high potency wool products business. We recently entered into an exclusive development agreement with an undisclosed top 20 pharma company to produce a high potency oral product.

We anticipate that this high potency business segment will grow over the next 12 to 18 months and beyond.

On the general CDMO front.

To support the recent commitment of a non U.S. company to a tech transfer for a marketed product.

We recently sold a 400 leader high sure granular leader and a 420 leader fluid bed dryer. This equipment will also expand the type of tech transfer products, we can work with.

Regret we recognize that in this challenging and unprecedented time U.S. pharmaceutical product manufacturing has never been more essential and we continue to provide important medicines to our customers nearly all of whom are on the front lines of this crisis, helping patients.

We believe our business has a solid foundation and that we have seen progress in our new business efforts of taking this opportunity to improve overall efficiency and implement certain upgrade.

With that I'll now turn the call over to Ryan for more detailed financials Ryan. Thanks, Jerry Good morning, everyone. Since we issued a press release that our form 10-Q earlier. This morning outlining our full financial results well just review some of the key highlights for the second quarter financials as of June Thirtyth 2020, we had fashion.

Cash equivalents of 22.8 million revenue for the three months ended June Thirtyth 2020 was 15.5 million compared to 31.3 million for the same period and 2019.

The decrease at 15.7 million was primarily due to decrease product sales in royalties recognize from three of our commercial customers.

The first key customer experience lower market share compared to 29 team.

Reentry other competitors that we previously communicated to the marketplace, but has maintained its market share since the first quarter of 2020.

The second key customer sold decreased sales that reduced our royalties in manufacturing volumes as a result of overall market forces. The third key customer decreased sales due to the impact of a combination of the overall market forces in the discontinuation of a commercial product line that we previously.

We communicated in the first quarter of 2020, we also experienced slower than expected new business project starts and overall growth due to the impacts of cobot 19.

We expect that the return of a competitor the market.

Experienced by one of our commercial partners overall coven 19 market force impacts through all of our customers discontinuation of product lines by two of our customers that was previously communicated in the first quarter slower than expected new project starts and potential delays and customer programs may continue to impact our revenue.

So in the third and fourth quarters of 2020, we're continuing to monitor these impacts I mean events and the covert 19 impacts on our business in revenues.

Cost of sales for the three months ended June Thirtyth 2020 was 11.6 million compared to 14.1 million for the same period and 29 team.

Cost of sales decreased two and a half million. It was not proportionate to the decrease in revenues, primarily due to fixed costs being spread over lower commercial volumes and slower than anticipated New project starts cost of sales also included point 2 million related to the second reduction enforce associated with country.

And you'd revised commercial volume and development revenue.

Selling general and administrative expenses for the three months ended June Thirtyth, 20, 24.3 million compared to 5.5 million for the same period in 2019.

The decrease of 1.3 million was primary primarily related to lower public company costs, and lower travel and marketing costs driven by the code at 19, pandemic, which were partially offset by higher selling costs due to the increased headcount and associated personnel cost focused on business development as well as the comes.

Police one of the readiness for the CTM business.

The three months ended June Thirtyth 2020, we reported a net loss of 6 million or 25 cents per diluted share compared to a net loss of 2.8 million or 12 cents per diluted share for the comparable period and 29 team which included losses from discontinued operations.

Moving on now for the six month financials revenue for the six months ended June Thirtyth 2020 was 37.3 million compared to 56.3 million for the same period in 2019. The decrease of 19 million in revenue was primarily due to the same factor factors that I mentioned earlier cost us.

Sales for the six months ended June Thirtyth 2020 was 29.9 million compared to 28.5 million for the same period in 2019 cost to sales increased 1.4 million and was not proportionate to the decrease in revenues again, primarily due to fixed costs being spread over lower commercial volumes two separate.

<unk> reductions in force were also undertaken in the first half of 2020 that are expected to drive annual estimated savings of 3.4 million in fiscal year 21.

Selling and general administrative expenses for the six months ended June Thirtyth 2020 were 9.7 million compared to 12, knowing for the same period in 2019 decrease of 2.3 million was primarily due to the same factor factors that I mentioned previously.

For the six months ended June Thirtyth 2020, we reported a net loss of 13.7 million or 58 cents per diluted share compared to a net loss of 4.8 billion EUR 21 cents per diluted share for the comparable period and 29 team, which included losses from discontinued operations.

Regarding forecast as Gerry commented earlier, we've decided to withdraw and suspend our financial guidance for 2020, primarily due to the difficulty of forecasting the impacts of cobot 19 on the balance of 2020 and its impact on market forces contracts timing of customer order patterns customer.

And Tory rebalancing and the timing of development projects as well as our belief that we cannot reliably predict factors relating to the macro market for our commercial customers and the timing of clinical trials and related CDMO services and the current covert 19 environment.

I'd now like to turn the call back to Jerry for closing comments Gerry. Thank you Ryan in closing I was just like to say that we remain steadfastly committed to all of our stakeholders.

We are focused on executing our strategic priority and are committed to delivering on recruits upside potential while prudently managing the business through this rapidly evolving economic situation.

I'd now like to open the call for questions operator.

That concludes our prepared remarks, we'll now open the call to your question.

Ladies and gentlemen, if you have a question at this time. Please press Star then the number one key on your Touchtone telephone. If your question has been answered or you wish to a movie yourself from the Q best Chunky.

Your first question comes from the line of Leland Gershell with Oppenheimer.

Good morning.

Thank you for taking my questions.

Well questions.

Hi.

First of all you know with regard to the different settings.

It should be numbers in the quarter and aren't breaking those out in detail, but if you could give us some kind of granularity as to.

Perhaps with the with the larger levers we're.

You know mylan versus.

The decrease prescriptions from cobot onto could shed some color there and also want to ask with regard to the new.

GTM agreements, which you've been signing at the same time you have those unit clinical trials have been slowing down run pause given given the pandemic. So wanted to ask how do you foresee utilization of revenues from those Greens things.

Sure. So I'll deal with a part of the first question then toss it to try and then come back for the CTM question live on so with respect to wrap and mill extended release, which is one of them far more important products.

We did see an impact on profit sharing but there was not any notable change in marketshare marketshare appears to be consistently sticking in about the 50% level for mylan and for tens that youre in the sector, but let me pass to Ryan for.

In overview, what was the bigger factors.

Showed as we look year over year I would say you know from both recent third party audit data that we have for the entire rapid middle market, both capsules and tablet forms.

Our being impacted probably in that 10% to 12% range.

During during the second quarter and we really believe this is consistent with the overall impacts to the marketplace and the other therapeutic areas. As a result of Kobin 19 supported by the third party marker report that we put out in published.

This morning in the 8-K and that's also are on our website the largest contributor year over year to the overall decrease in revenue.

Was was BRAF, a mill, which made up about two thirds of the decline.

One thing that you have to recall and remember it is a tough comparison year over year as our base business. In 2019 saw notable upside dude due to mylan being out of the market place for both the rapidly as our in PM products and only supplying the more.

Market on a limited basis and that really last year resulted in increase in purchases from both tablet and when that in the prior year as they were filling mileage shortfall.

And that obviously resulted in higher manufacturing and profit sharing revenues for US we also saw that.

And if you will recall, what we communicated in the prior year was that the capsule volumes for one of our customers in the first half to 2019.

Because of that exceeded all of their 2018 capsule volumes. So to some extent, it's a it's a very hard comp, but the majority of decreases related to to that and then as we think about sequentially.

Sequentially I'd say the biggest change in revenue that we saw was primarily attributed to the 80 HD products and again, that's that's supported by not only the third party audit data that we received but also in line with.

The market data trending report that we saw.

That has been having an impact.

Page students at home or not apparently taking their HD products in the way they would have taken in the classroom setting.

Yes, I mean, I think the third party data for the HDD market, including both mess.

Methylphenidate index methylphenidate, both the capsules and tablets decreased you know over 20 plus percent from from Q2 versus Q1, and we saw similar maybe a little bit higher decreases amongst.

The the products that we sell to Novartis.

And that was consistent with that sector, not just with the novartis product, but with other products too.

On that on the CTM side.

Let me give you second do you have any follow up and or.

No no no that's a great.

Okay. So on the CTM side.

Recognizing that trials may not be going full at the pace since they would have in the absence of the pandemic and there was a very notable slowdown in the second quarter of this year for new trial starts we are seeing a number of folks that we deal with customers.

And other prospects that are saying to themselves they want to be ready to begin as soon as they reasonably Ken. So they are proceeding with some projects that are for instance, like over encapsulation of a comparative drug war of a placebo.

They are looking at.

Just in time packaging, meaning you may have done a run for a double blind trial, but you're only going to set up either by site or by patient as you're ready for them somewhere like just in time logistics, which was not common in past days, but has become more so because of the pan.

The American patients not wanting to be at centers and sponsored not wanting to risk their contamination.

So that's an area that we're seeing.

Some demand and also just some opportunities for packaging on the commercial side as well the can fall under that umbrella. There are some that have developed in recent months and all this is because we started pre selling these services before we had finished.

All of the less Adelphia and cross cities, we have done that now we had done some clinical trials logistics and materials prior to this effort, but we've expanded the scope and size and in particular, the warehouse that will be necessary to keep that.

Understood and I mean, one follow up if I may you had.

Swung to cash flow positive briefly.

We'll now in the absence of guidance the workforce reductions will benefit due next year, we got the uncertainty it depends on mix any.

Perspective, you can share on.

Companies.

Cash flow.

Outlook.

As we only get through the rest of this year next year. Thanks.

Yeah.

Yes, so thanks, Leo and from a cash and cash equivalents perspective again, we ended the quarter with about 23 million you know the cash should remain relatively consistent for the remainder of the year plus or minus a couple of million.

I think you know it from a covenant perspective.

As far as our debt, we haven't broken any covenants as of Q2 based on the minimum cash liquidity Covenant. We don't currently expect any problems with you know, making the required amortizing principal payments that began in early 21.

And based on what we currently believe than what you can see with our trailing 12 month EBITDA leverage you know it's going to be close we don't have perfect certainty. We do have a good relationship with our lender and we're continuing to have ongoing dialogue and provide them with business update.

It's including the impacts that we're seeing from co but on the business and how we're responding to those challenges.

All right. Thank you very much for taking my questions.

Thanks, Phil I appreciate it.

Your next question comes from the line of Jacob Johnson with Stephens.

Hey, Thanks for taking my question can can you size up the potential revenues from from these new high potency business wins.

Much of how much to these offset some of the headwinds you're facing here in the near term.

I mean, it's a reasonable question and we don't typically release individual project sizes.

But let's say, they're not going to.

They're not going to make or break, but it's always hard to get people to want to be first the new service offerings. We have that now on a project I think is.

Have a household name company and we think that's going to make it easy there are number proposals out there in the Hypos side, and we think it will get easier to get folks across the finish line now that somebody else. That's been doing those projects can get quite big where on the development side right now with the opportunities where.

Looking at so they will tend to be you know in the neighborhood of under a million dollars to start with but again as with the other development side as you grow and.

Come back for the next phase there doubling and so on same is true for the stability in the analytical says here with those.

Those can be a little bit more expensive because of the precautions that need to be taken dealing with those molecules on the CTM side. That's a business that we have seen grow very rapidly for some other very large companies. We don't have the same footprint that some of those very large companies do.

But it isn't an area that a number of our existing customers and prospects have been asking about we've brought in bill Hirschmann, who has a terrific track record of selling services in the development clinical and then CTM space over a 30 year career and had a big impact on.

Growing that business.

For a a top three logistics company.

In the area of hundreds of millions of dollars of increase over a period of time. We recognize this is does not happen in 10 minutes I wish it did but we do think it's an area that typically is shorter term from getting a project to turning it into cash and also another way in the door with customers.

As who may not have worked with us before it gives them an opportunity to work with us in a way that lets and begin to see some of their related surfaces analytical stability for the stability of supplies put up.

The ability of the team to do over encapsulation work it could be part of that that might bringing more clinical trials, where we're conceivably even commercial work for which we also have capacity and I think those two along with getting the first of what we hope will be more tech transfer opportunities, where we can.

Provide complexes hitch form with some.

Expertise that we have and reassure a non U.S. based customer that we can successfully transfer tech transfer that product, even though those tech transfers can take some time to get into full swing there definitely worth having and hopefully the one to become part of the installed base.

Commercial side.

Got it thanks for all that color Jerry and just just one other follow up question.

I think last quarter, Jerry you talked about the search for permanent CEO can you can you just give us an update on that effort.

Sure.

The board has retained a top three national search firm.

And has been for several months now well more than several months looking at candidates and going through a process and we you know I know that the board is interested in getting someone into that seat was the right kind of experience and ready to go and we will certainly do anything we tend to be support.

Of that and I remain in the meantime, and after that committed as companies I will be staying on the board even after that.

Great. Thanks for taking the questions.

Thanks Chicken.

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

Thank you operator, and thank you all for joining US here. This morning have a good day and we will journey on and continue to push forward and growing our business. Thanks for your support bye.

Ladies and gentlemen. This concludes today's conference. Thank you for your participation have a wonderful day you may all disconnect.

[music].

Mhm.

[music].

Good morning, and welcome to the rent growth second quarter 2020 financial results Conference call.

At this time, all participants are and they listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time.

As a reminder, this conference is being recorded at the company's request.

I would now like to turn the call over to Claudia Spice Linger Investor Relations you may begin.

Good morning, and thank you for joining us on today's conference call to discuss recruit second quarter 2020 financial results.

It's called East I figure and I'm joined today by Gerri, Henwood, President and Chief Executive Officer, and Ryan like Chief Financial Officer.

Well I 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 and operating results for the three and six month ended June 30 2020.

The press releases are available on the investors page of our website at www Dot recruits T Dmone dot com.

Before we begin our formal comments I'll remind you the various remarks, we make today constitute forward looking statements pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act up 1995, including statements related to our financial outlook. 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 I expect clan well may anticipate Billy you estimate upcoming should intend in other words of similar meaning.

The following are some of the factors that could cause our actual results to differ materially from those expressed and or underlying our forward looking statements.

Customers changing inventory requirements and manufacturing plans customer decision to move forward with our manufacturing services.

Average profitability or many other products, we manufacture or customers facing increasing or new competition. This list of important factors if not all inclusive.

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 operation sections of recruit games belts and your report on form 10-K for the fiscal year ended December.

31, 20, my team and any quarterly reports on form 10-Q, which are on file with the Securities and Exchange Commission and available on that Ccs website.

The information we provide on this conference call is provided only as of today of this call August 10, 2020, 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.

Actual results may differ materially.

We may also discuss certain non-GAAP financial measures with respect to our financial performance for the second quarter 2020.

Specifically, we may discuss the operating income or loss as adjusted or the earnings before interest taxes, depreciation and amortization or EBITDA as adjusted historical CPM, though once you exclude public company cost or EBITDA as adjusted Standalone Watch public company costs.

We believe these non-GAAP financial measures are helpful in understanding our business as they give investors greater transparency as to the supplemental information used by management and evaluating the financial performance of our but.

I can't quality and good morning, everyone.

We hope those joining us today of keeping safe and healthy is we'll continue to navigate through the ongoing global cobot, 19th and them.

I think covert 19 situation continues to evolve we have implemented new ways of working at our primary concern remains the health and safety of our associates, our customers and the patients treated with the products, we manufacture as well as far shareholders.

I'd like to take a moment to discuss some of the challenges from the quarter.

Coven 19 pandemic continues to have certain adverse effect on both the U.S. world economies, including the commercial activities of our customers and peers.

Looking ahead over the next few quarters, we expect the pandemic to continue to have some impact on our customers and the therapeutic categories. They serve.

We expect some continued volatility in our customer sales and inventory levels.

They adjust to uncertainties surrounding the pandemic, including a potential for fewer patient visits to doctors offices access to help tele health as a result reduction in new and refill prescription right.

Given the continued uncertainty of the impact as a pandemic on our business at operations. We believe it is prudent to withdraw suspend our 2020 financial guidance.

As Brian will come from later.

I refer you to the two slides of the recently issued third party market data, which surveys the impact seen across many therapeutic areas, including a 15% decline in retail rates for cardiovascular medication and a 41% decline in pediatric.

Medications to name a few.

These slides are attached as an exhibit the recro second quarter earnings release 8-K.

This morning, I can also be found on the Investor section of our website under presentation.

As a result recruits business and results of operations have been adversely affected in ways that were not anticipated when the first quarter was reported.

The consequences to commercial work or seen in terms of manufacturing volumes and certain profit sharing result, even.

Even while maintaining market share such as for Tevas for rapid mill your business.

We believe this is due to reduced total prescription rates for many chronic therapeutic including brought them though.

Certain development <unk> customers continue to revisit their product development priorities or the timing of services due to the impacts of coven 19 on their potential financing timing of trials changes and staffing etcetera.

As a result, we have seen delayed new business project starts.

We believe in the intrinsic my read of the commercial products, we manufacture for customers.

So all of therapeutic and that there will be stabilization and eventual return to more regular habits.

Prescription filling and patient compliance with these products.

As we adjust to life with a pandemic backdrop.

However, we will continue to monitor the situation closely at our actively looking for ways to reduce costs I can serve operational resources.

During the second quarter as a pandemic continued to have an adverse effect on revenue.

We generated 15.5 million for the quarter.

Spike despite coven 19 or operations remain stable and we successfully launched our new CTM business and secured multiple new customers.

This includes the ability to fulfill product clinical trial material orders for cutting edge clinical trial design.

For most clinical trial being conducted in the backdrop of the covert 19 pandemic sponsors are trying to keep patient facing their homes and olive clinics and hospitals, where they could be more vulnerable to capturing the virus. So CTM service offerings are also attractive to customers because of direct to patient.

Logistic.

In response to these key emerging customer needs.

And utilizing our regulatory analytics and logistics expertise, our new CTM business includes a fully integrated service offering from Nonclinical formulation apiay characterization and manufacturing.

Clinical trial material manufacturing, including over encapsulation and double blind packaging.

We also provides stability testing as well as packaging services and direct to patient shipping.

For the trials ultimately be successful, we're also able to offer commercial pocketing services.

Another business segment I'd like to highlight is our high potency or products business. We recently entered into an exclusive development agreement with an undisclosed top 20 pharma company to produce a high potency oral product.

We anticipate that this high potency business segment will grow over the next 12 to 18 months and beyond.

On the general CDMO front.

To support the recent commitment of the non U.S. company to a tech transfer for a marketed product.

Recently sold a 400 leader hikes, your granulate or an a 420 leader fluid that dryer.

Equipment will also expand the type of tech transfer products, we can work with.

Regret we recognize the in this challenging an unprecedented time U.S. pharmaceutical product manufacturing has never been more essential and we continue to provide important medicines to our customers nearly all of whom are on the front lines of this crisis, helping patients.

We believe our business has a solid foundation and that we have seen progress in our new business efforts as taking this opportunity to improve overall efficiency and implement certain upgrade.

With that I'll now turn the call over to Ryan for more detailed financials. Ryan. Thanks. Good morning, everyone. Since we issued a press release on our form 10-Q earlier. This morning outlining our full financial results I'll just review some of the key highlights for the second quarter financials as of June Thirtyth 2020, we had cash and cash.

Equivalents of 22.8 million revenue for the three months ended June Thirtyth 2020 was 15.5 million compared to 31.3 million for the same period in 2019.

The decrease at 15.7 million was primarily due to decreased product sales and royalties recognize from three of our commercial customers. The first key customer experience lower market share compared to 29 team.

Reentry of a competitor that we previously communicated to the marketplace, but has maintained its market share since the first quarter of 2020. The second key customer saw decreased sales that reduced our royalties and manufacturing volumes as a result of overall market forces.

The third key customer decreased sales due to the impact of a combination of the overall market forces in the discontinuation of a commercial product line that we previously communicated in the first quarter of 2020, we also experienced slower than expected new business project starts and overall growth due to the.

Impacts to covert 19.

We expect that the return of a competitor the market.

Experienced by one of our commercial partner overall Coven 19 market force impacts to all of our customers discontinuation of product lines by two of our customers that was previously communicated in the first quarter slower than expected new project starts and potential delays and customer programs may continue to impact our revenue.

In the third and fourth quarters at 2020, we're continuing to monitor these impacts.

And the Cove at 19 impacts on our business in revenues.

Cost of sales for the three months ended June Thirtyth 2020 was 11.6 million compared to 14.1 million for the same period in 2019.

Cost of sales decreased two and a half million and was not proportionate to the decrease in revenues, primarily due to fixed costs being spread over lower commercial volumes and slower than anticipated New project starts cost of sales also included point 2 million related to the second reduction in force associated with content.

You'd revised commercial volume and development revenue.

Selling general and administrative expenses for the three months ended June Thirtyth 2020 were 4.3 million compared to 5.5 million for the same period in 2019 decrease of 1.3 million was primary primarily related to lower public company costs and lower travel in marketing costs driven by the Covance.

19, pandemic, which were partially offset by higher selling costs due to the increased head count and associated personnel costs focused on business development as well as the completion of the readiness for the CTM business.

The three months ended June Thirtyth 2020, we reported a net loss of 6 million or 25 cents per diluted share compared to a net loss of 2.8 million or 12 cents per diluted share for the comparable period in 2019, which included losses from discontinued operations.

Sales for the six months ended June Thirtyth 2020 was 29.9 million compared to 28.5 million for the same period in 2019 cost of sales increased $1.4 million and was not proportionate to the decrease in revenues again, primarily due to fixed costs being spread over lower commercial volumes two separate.

Reductions in force were also undertaken in the first half of 2020 and are expected to drive annual estimated savings of 3.4 million in fiscal year 21.

Selling and general administrative expenses for the six months ended June 32020 were 9.7 million compared to 12 million for the same period in 2019 decrease of 2.3 million was primarily due to the same factor factors that I mentioned previously.

For the six months ended June Thirtyth 2020, we reported a net loss of 13.7 million or 58 cents per diluted share compared to a net loss of 4.8 million or 21 cents per diluted share for the comparable period and 29 team which included losses from discontinued operations.

Regarding forecast as Gerry commented earlier, we've decided to withdrawn suspend our financial guidance for 2020, primarily due to the difficulty of forecasting the impacts of cobot 19 on the balance of 2020 and its impact on market forces contracts timing of customer order patterns customer.

Tory rebalancing and the timing of development projects as well as our belief that we cannot reliably predict factors relating to the macro market for our commercial customers and the timing of clinical trials and related CDMO services and the current Covance 19 environment.

I'd now like to turn the call back to Jerry for closing comments Gerry. Thank you Ryan in closing I was just like to say that we remain steadfastly committed to all of our stakeholders.

We are focused on executing our strategic priority and are committed to delivering on recruits upside potential while prudently managing the business through this rapidly evolving economic situation.

I'd now like to open the call for questions operator.

That concludes our prepared remarks, we'll now open the call to your question.

Ladies and gentlemen, if you have a question at this time. Please press Star then the number one key on your Touchtone telephone. If your question has been answered or you wish to move yourself from the Q best Chunky.

Your first question comes from the line of Leland Gershell with Oppenheimer.

Good morning.

Thanks for taking my questions.

A couple of questions.

So first of all you know as regards to the the differences is.

Such that the numbers in the quarter and aren't breaking those out in detail, but if you could give us some kind of granularity as to.

Perhaps with the larger levers we're.

Mylan versus.

The decrease prescriptions from co that you could share some color there and also wants to ask with regard to the new.

CGM agreements, which you've been signing at the same time you have those clinical trials have been slowing down.

On pause given given the pandemic. So wanted to ask how do you foresee realization of revenues from those Greens. Thanks.

Sure. So I'll deal with a part of the first question then toss it to Ryan then come back for the CTM question. Louis So.

With respect to wrap the mill extended release, which is one of far more important products. We did see an impact on profit sharing but there was not any notable change in market share market share appears to be consistently thickening and about 50%.

Level for Mylan and or has that youre in the sector, but let me pass to Ryan for an overview what was the bigger factors.

So as we look year over year I would say from both recent third party audit data that we have for the entire Veracel no market, both capsules and tablet forms.

Our being impacted probably in the 10% to 12% range.

During during the second quarter and we've really believe this is consistent with the overall impacts to the marketplace and the other therapeutic areas. As a result of covert 19 supported by the third party marker report that we put out in published.

This morning, ending 8-K, and that's also on our website the largest contributor year over year to the overall decrease in revenue.

Was was rapid mill, which made up about two thirds of the decline.

One thing that you have to recall and remember it is a tough comparison year over year as our base business in 2019 saw notable upside dude due to.

Mylan being out of the marketplace for both the rapid mill as our NPM products and only supplying.

The market on a limited basis and that really last year resulted in a increase in purchases from both Teva and one that in the prior year as they were filling mileage shortfall.

And that obviously resulted in higher manufacturing and profit sharing revenues for US we also saw that.

And if you'll recall, what we communicated in the prior year was that the capsule volumes for one of our customers in the first half at 2019.

Because of that.

Exceeded all of their 2018 capsule volumes so to some extent, it's a it's a very hard comp, but the majority of.

The decrease is related to that and then as we think about sequentially.

Sequentially I'd say the biggest change in revenue that we saw was primarily attributed to the 80 HD products.

And again, that's that's supported by not only the third party audit data that we receive but also in line with.

The market data trending report that we saw.

That has been having an impact.

Pays students at home or not apparently taking their HD products in the way they would have taken in the classroom setting.

Yes, I think the third party data for the HD market, including both.

Yes.

Methylphenidate index methylphenidate, both the capsules and tablets decreased.

Over 20 plus percent.

From from Q2 versus Q1, and we saw similar maybe a little bit higher decreases amongst.

The products that we sell to Novartis.

And that was consistent with that sector, not just with the novartis product, but with other problems.

On that on the CTM side.

Let me give you second do you have any follow up.

No Thats go right ahead Gerry.

Okay. So on the CTM side.

Recognizing that trial may not be going forward at the pace that they would have in the absence of the pandemic and there was a very notable slowdown.

In the second quarter of this year for new trial starts we are seeing a number of folks that we deal with customers and other prospects that are saying to themselves they want to be ready to begin.

Soon as they reasonably Ken so they are proceeding with some projects that are for instance, like over encapsulation of a comparative drug or placebo.

They are looking at.

Just in time.

Packaging, meaning you may have done a run for a double blind.

Trial, but you're only going to set up either by site or by patient as you are ready for them. So more like just in time logistics, which was not common in past days, but has become more so because of the pandemic and patients not wanting to be at centers and sponsored not wanting to risks.

Contamination.

So thats an area that we're seeing.

Some demand and also just some opportunities for packaging on the commercial side as well can fall under that umbrella. There are some that have developed.

In recent months and all this is because we started pre selling these services before we had finished all of the less data and cross cities. We have done that now we had done some clinical trials logistics and materials prior to this effort, but we've expanded.

The scope and size and in particular, the warehouse that will be necessary to keep that.

Understood and one follow up if I may you had.

Swung to cash flow positive briefly.

And the absence of guidance the workforce reductions will benefit next year.

Uncertainty the pandemic any.

Perspective, you can share on.

Companies.

Cash flow.

Outlook.

As we only get through the rest of this year next year. Thanks.

Yes.

Yes, so thanks Leo and.

From a cash and cash equivalents perspective again, we ended the quarter with about 23 million the cash should remain relatively consistent for the remainder of the year plus or minus a couple million.

[music].

I think.

From a covenant perspective.

As far as our debt, we haven't broken any covenants as of Q2.

Based on the minimum cash liquidity Covenant, we don't currently expect any problems with.

Making the required amortizing principal payments that began in early 21.

And based on what we currently believe than what you can see with our trailing 12 month EBITDA leverage what's going to be close we don't have perfect certainty.

We do have a good relationship with our lender and we're continuing to have ongoing dialogue and provide them with business updates, including the impacts that we're seeing from co but on the business and how we're responding to those challenges.

Alright, Thank you very much for taking my questions.

Thanks I appreciate it.

Your next question comes from the line of Jacob Johnson with Stephens.

Hey, Thanks for taking my question.

Can you size up the potential revenues from from these new high potency business wins.

How much of.

How much can these offset some of the headwinds you're facing here in the near term.

I mean, it's a reasonable question and we don't typically release individual project sizes.

But let's say, they're not going to.

They're not going to make or break, but it's always hard to get people to want to be first in new service offerings. We have that now on a project that I think is.

The household name company, and we think thats going to make it easy there are number proposals out there in the hypo side, and we think it will get easier to get folks across the finish line now that somebody else that's been doing it those projects can get quite big where on the development side right now with the opportunities were lower.

And so they will tend to be in.

In the neighborhood of under a million dollars to start with but again as with the other development side as you grow and come back for the next phase there doubling until one.

Same is true for the stability in the analytical associated with those are those can be a little bit more expensive because of the precautions that need to be taken dealing with those molecules.

On the CTM side, that's a business that we have seen grow very rapidly for some other very large companies. We don't have the same footprint that some of those very large companies still but it is an area that a number of our existing customers and prospects have been asking about.

We brought in Bill Hirschmann, who has a terrific track record of selling services in the development clinical and then CTM space over a 30 year career and had a big impact on growing that business.

For a top.

Three logistics company.

As who may not have worked with us before it gives them an opportunity to work with us in a way that lets and begin to see some of the related services analytical stability for the stability of supplies put up the ability of the team to do over encapsulation work that could be part of that that might bring in more clinical trials.

Conceivably, even commercial work for which we also have capacity and I think those two along with getting the first of what we hope will be more tech transfer opportunities, where we can provide.

Complexes hitch form with some.

Expertise that we have and reassure a non us based customer that we can successfully transfer tech transfer that product, even though those tech transfers can take some time to get into full swing there definitely worth having hopefully going to become part of the installed base.

On the commercial side.

Got it thanks for all that color Jerry and just just one other follow up question.

I think last quarter, Jerry you talked about the search for permanent CEO. Keith can you just give us an update on that effort.

Sure. The the board has retained a top three national search firm and has been for several months now well more than several months looking at candidates and going through a process and we you know I know that the board is.

Interested in getting someone into that seat with the right kind of experience and ready to go and we will certainly do anything we tend to be supportive of that and I remain in the meantime, and after that committed as companies I will be staying on the board even after that.

Great. Thanks for taking the questions.

Thanks Chicken.

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

Thank you operator, and thank you all for joining US here. This morning have a good day and we will journey on and continue to push forward and growing our business. Thanks for your support bye.

Ladies and gentlemen. This concludes today's conference. Thank you for your participation have a wonderful day you may now disconnect.

Q2 2020 Recro Pharma Inc Earnings Call

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