Q3 2020 Recro Pharma Inc Earnings Call

Excuse me, ladies and gentlemen, this is the operator todays conference is scheduled to begin momentarily until that time your lines will again be placed on musical. Thank you for your patience.

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At this time all participants are in a listen only mode later.

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

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

I would now like to turn the conference call over to Claudia stocks linger with Investor Relations you may begin.

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

This is claudia stationary and I'm joined today by Gerri, Henwood, President and Chief Executive Officer, and Ryan Lake Chief Financial Officer. Please.

Following prepared remarks today by jury 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, 2020. The press release is available on the investors page of our website at www Dot recruit CDMO dot 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 statements related to our financial outlook. These forward looking statements are subject to risks and uncertainties that may cause actual.

It's 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.

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

Customers changing inventory requirement.

Continuing adverse impacts from customer inventory rebalancing disruption in raw materials or supply chain and manufacturing plans customer decisions to move forward with other manufacturing services average cost per bit profitability or mix of the products we manufacture.

Or customers facing increasing or new competition.

This list of important factors as not all inclusive.

Any such forward looking statements are not guarantees of future performance and involve certain risks and uncertainties. These risks are described the risks factors and management's discussion and analysis of financial condition and results of operations sections. Every gross annual report on form 10-K for the fiscal year ended December 31.

2018, 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.

And the information we provide on this conference call is provided only as of the date of this call Monday November 920 20.

And we undertake no obligation to update any forward looking statements. We 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 I would now like to turn the call over to Gerri Henwood Jerry.

Thank you Cody and good morning, everyone.

We hope that is joining us today are keeping safe and healthy as we all continue to navigate through the ongoing global COVID-19 pandemic.

The third quarter of 2020, we generated revenue of 19.3 million, an increase of 24% compared to the second quarter of 2020. We're encouraged by this positive trajectory coming out of the first half of the year, which was a challenging period for our commercial first because of Mylan reentering the market and the impact.

The the COVID-19 pandemic.

We continue to enhance our business development team and have promising CDMO opportunities, adding to our momentum going into 2021 [laughter] we.

We believe the COVID-19 pandemic is likely to continue to impact end user demand inventory rebalancing and project starts through the remainder of the year and beyond I'd now like to highlight several new business growth initiatives.

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Our formulation development services business unit, which we call our G.D., we secured multiple phase II modified release projects from new customers. During the third quarter all of which include analytical formulation optimization and C.T.M. work.

Hi, potency group continues its development work with a top 20 pharmaceutical company to formulate a high potency oral new chemical entity.

And finally, we are pleased with the amount of add on or extension work, we're earning from so many of our existing customers approximately 90% of our development customers have proceeded to sign proposal for extensions of work and next phase development projects.

Repeat customers or a strong sign of the confidence our clients have and our technical and execution abilities.

As always we continue to deliver superior manufacturing and development services to our customers as their projects grow and evolve.

Since the launch of our clinical trials material and logistics or CTM business unit in June of 2020, we've seen interest in this area increase and early work has resulted in expanded proposals from multiple current and prospective clients.

Customers are able to take advantage of moving directly from manufacturing clinical trial drug product right into our double blind packaging labeling and distribution services.

We've received highly positive feedback from customers, who are recognizing the value and benefit of utilizing recro as a single resource for their diverse manufacturing needs.

We currently anticipate that some of our customers who had not realized our capabilities for double blind clinical trial packaging will now look to add this offering as well.

In addition, we all are also actively enhancing our business development team to further support the anticipated growth of our CPM business.

In November we signed a three year extension to our licensing and supply agreement with one that.

A generic pharmaceutical company for viral NPM, Maryland, <unk> SAR and for rapid no P M.

The signing of this agreement included a $1.9 million upfront cash payment.

And a half a million dollars per year licensing fee for each of the three extension years.

Ending on December 31st 2024.

Before I turn the call over to Ryan to review the financials I'd like to take a moment to discuss a recent corporate initiative to restructure our existing debt agreement with a tier one capital management.

In early November we worked with our partnership theory M to amend the credit agreement, which allowed us to secure more flexible covenant terms.

Pay down a portion of our principal balance without penalty and defer remaining scheduled principal repayments until 2022 as part of our plan to de lever the company over time.

The repayment of $9 million of loan principal this month without prepayment penalties will immediately lower our interest payments going forward.

The amendment enables us to execute on our further growth strategies.

With that I'll turn the call over to Ryan. Thanks, Jerry Good morning, everyone. Since we issued a press release and our form 10-Q earlier. This morning outlining our full financial results I'll just review some of the key highlights as of September Thirtyth 2020, we had cash and cash equivalents of 21 and a half million.

Revenue for the third quarter of 2020 was 19.3 million, an increase of 24% or 3.8 million sequentially from 15.5 million in the second quarter of 2020, although a decrease of 6 million compared to 25.3 million for the same period in 2019.

You touched on this earlier, but to elaborate.

The favorable impact sequentially was driven by customers rebalancing their inventory levels and an improvement in profit sharing results decreased from the prior year third quarter of 2019 was primarily the result of customer ordering patterns in the prior year and the loss of rock mill MSR Mark.

At shared by our commercial partners in the first quarter of 2022, the re entry of a competitor Mylan.

Our commercial partner has sustained its market position for the Veracel mill MSR capsules since the end of the first quarter of 2020. The COVID-19 pandemic has resulted in variance is due to the impact of commercial customers rebalancing their inventory levels decreased end user demand and slower than expected new business.

Starch higher revenues from new business growth activities has partially offset the decrease including a significant new commercial product and tech transfer project costs of sales were 11.7 million for the third quarter, a 2020 compared to 11 million for the third quarter 2019.

The increase of <unk> point, Sevenmillion was not proportionate to the decrease in revenue primarily due to lower overall commercial manufacturing volumes and the related impact on fixed costs expenses expense through cost of sales. Despite having made earlier reductions in the workforce and implementing other cost saving measure.

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Selling general administrative expenses were four and a half million for the third quarter, a 2020 compared to 4.1 million for its third quarter 2019.

The increase of 8.4 million was primarily related to our new business development efforts related to the launch of our CTM business.

Recro reported a net loss of 2.1 million or nine cents per diluted share for the third quarter 2020, this compared to a net loss of 4.3 million or 18 cents per diluted share for the third quarter of 2019, which included a loss from discontinued operations.

Moving on now to the nine month financials revenue was 56.6 million for the nine months ended September Thirtyth 2020, compared to 81.6 million for the same period of the prior year a decrease of 25 million primarily due to the same factors as I previously described in a three month results call.

Cost of sales were 41.6 million for the nine months ended September Thirtyth 2020, compared to 39 and a half million for the same prior year period. The increase of 2.1 million was not proportionate to the decrease in revenue primarily due to lower commercial manufacturing volumes and the related impact on fixed costs expense through cost.

The sales, despite making reductions in workforce and implementing other cost saving measures as well as increased cost of development sales on higher revenues cost savings generated from these activities are expected to continue into 2021.

Selling general and administrative expenses were 14.2 million for the nine months ended September Thirtyth 2020, compared to 16.1 million for the same prior year period, a decrease of 1.9 million, primarily due to lower public company costs, partially offset by our new business development efforts and launch of the CTM business.

[noise] Recro reported a net loss of $15.8 million or 67 cents per diluted share for the nine month period of 2020, this compared to a net loss of 9.1 million or 39 cents per diluted share for the comparable period of 2019, which included a loss from discontinued operations we have.

Generated 14.2 million in cash from operations year to date through September Thirtyth and ended September 21, and a half million of cash on hand, I'll now turn the call back to Jerry for closing comments Gerry. Thanks.

Thanks Ryan.

In closing I, just like to say that we remain committed to our customers suppliers business partners shareholders and employees working.

We're committed to delivering on recruits upside long term potential while prudently managing the business through this rapidly evolving economic situation.

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

Operator.

Excuse me operator are you there we're open to taking questions.

Well for those listening it sounds like we may have some technical difficulties.

Well hold just for a moment to see if we can resolve those but for those of you that need to drop off before that time. Thank you very much for joining us here today and have a good day.

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Ladies and gentlemen, sorry for the delay if.

If you would like to ask a question. Please press star one on your telephone keypad.

And your first question comes from Lane Gershell with Oppenheimer.

Good morning.

Good morning, my own question [laughter].

Thanks for the update.

Wanted to ask you as we think about sort of the weights of the different factors going from Q2 to Q3, you know did commercial customers you know certainly a resumption in.

In a level of end user products the pull through perhaps for the smaller customers maybe less hesitation to do.

To do business enter into contracts move along with contracts maybe.

If you can speak to that kind of the different weighting of those.

Factors that could affect 19 in the background as we went from Q2 to Q3 and they've got a follow up thank you.

Sure. Thanks, Lynn I'll do the Qual, and then pass to Ryan for the question on that so we did see a number of customers who had in the second quarter have been holding off on hitting the red button to start their projects.

Come back to us.

Generally fairly recently, a little bit towards the end of the third quarter and a little bit more now to say that they wanted to get some programs going that were on somewhat indefinite hold but because.

Covanta has no clear end date, I think they began to think that they need to make some progress. So I think that has contributed somewhat.

In addition to.

It's somewhat of a return to prior to cope with levels of total Rx prescription filling for some of our profit sharing products, but I'm going to pass it over to Ryan for a little more quantitative on that.

Yes. Good question later, when I mean, the the 24% increase sequentially you know I would say is roughly driven you know half by higher product shipments and timing of those shipments you know we described earlier some of our customers rebalancing their inventory levels as a result of co bid and then the other poor.

Action or approximately the other half maybe slightly under half was really driven by improvements in our customers' profit sharing so improvements in the gross to nets for our partners.

Okay. That's helpful. And then I guess actually another question just to drill down into this.

Further across the customers you have with commercial products was it a fairly even trend back in Q3 were were certain customers still more more depressed.

Versus Q2 levels.

In terms of the product landscape for MACI.

That's it.

So again remembering that we don't it isn't usual that we are making in seeing the products sold and similar quarters Theres a skew from when we will have made material until they're actually pulled through the end user for those products subject to profit sharing agreements they'll come back to that but.

For those products that are being shipped it it really reflects where is that customers inventory and how are they ordering for word.

And I would say that.

Like others in the class, we do see that the 80 each the products are not moving at the same level velocity that they had before cove it.

And so that remains somewhat impacted as it had been but I think we do see a little bit more return to normalcy at least on the pull through side for cardiovascular products and are up and they'll products seem to be included in that mix Bryan to add anything to that yeah.

Yeah, I would just say that you know.

Echoing what Jerry said I mean, we.

Our impacted by our customers ordering patterns. So certainly there can be volatility between quarters and certainly our customers have probably been trying to adjust their inventory levels not only to new competition competition, but.

No the uncertainty surrounding the pandemic and you know everything from stockpiling and Madison to patient visits and that certainly has an impact we don't control that.

Our customers are more indirect touch with that but obviously impacts our volumes I'd say what we.

And see in terms of.

Visibility right now and to you know.

Having a little bit of long term visibility into our customer forecasts you know, we're seeing you know some.

Kind of normalization as they work through not only their inventory levels and rebalancing knows the impacts of co bid.

And as you know Mylan being back in the market. You know there is some stabilization of kind of anticipated manufacturing volumes in our projections as we look out into 2021.

Okay got you that's helpful and then my last question.

Just a quick comment on the pipeline of potential new business that you have Jerry in past quarters you've had.

Commentary about a number of them.

As opportunities kind of in the Hopper that we're moving along and are we seeing now this is a Q3 revenue bump.

That's the realization of a number of discussions that came to fruition. How should we think about the continued pipeline of newer discussions that may.

Come to agreements.

Yes, Thanks, Greg Great question, and I will say that we have we've had the opportunity to see some other projects that had been pending for a while come to fruition and the beginning phases of most projects you know are not going to be like rocket ships, but they're like steady incremental steps as we.

I mentioned on the the phase two.

Multi formulation projects that we have right now those are very encouraging because.

Got between ethanol harm a number of those if not all of those will proceed to be come eventually phase three projects and sell it. So there is a very positive the CPM business were very excited and we've got some some work underway and we have some large proposals pending with customers that we've had.

For other reasons, who are interested in us having not been aware that we were buying.

Finalizing the availability of that service on the scaled up basis.

And so with that again, they're not all in hand, but they are very encouraging because in general CTM Mark is a shorter sales cycle and also a shorter cycle to earn in general than most of the development work, which will will take six months or longer sometimes to pull away through so.

Those are encouraging we've added a couple of very experienced.

Sales persons to the mix with CTM specific experience and so we're also very encouraged by that but I think you know recognizing that we want to continue to see new growth for him.

And that tech transfer is beginning to come into period of a greater revenue, earning as we would during 21 do the installation of required equipment and some validation batches I mean, all of those things I think are going in the right direction and the opportunities that were getting it back.

S four and that we're converting on seem to be much much better than they were this time last year.

Okay very good thanks, very much for taking the questions.

Thanks, Phil.

And your next question comes from Jacob Johnson with Stephens.

Hey, Thanks, Good morning, Jonathan.

I guess following up on some of that commentary understanding that there's there's normally or there can be quarter to quarter movements in inventory in order patterns not to mention what's going on with co then and the fact, you don't have formal guidance, but is it fair to think of this third quarter revenue level is lease is at least a flow.

4% for how we should be thinking about the fourth quarter are there any other kind of moving pieces, we should be aware of.

So the one major factor every year is how much inventory our customers want to be holding at the end of the year.

And if you look historically at our fourth quarter patterns, you'll see that that is it's not always the highest ordering quarter. Ryan do you want to add anything to that.

Yeah, I mean again and we made some remarks about this or earlier I mean, we continue to expect to see some impacts of that customer inventory rebalancing and co bid through the end of this year or what gives us some optimism.

A lot of optimize optimism is kind of what we're seeing from our customer for cash right now, especially into the first half of 2021. So you know again I wouldn't you know it this isn't a quarter to quarter thing I think normally you're looking at kind of a normalization over a period of 12 months and that's why.

What we're looking at right now in terms of you know our customer forecasts certainly you know as I as I mentioned before.

You know the impact from manufacturing volumes from the impact of customers rebalancing their inventory levels from coated the product Discontinuations, we had and Mylan, we really think that you know well, we'll see some of that impact for the remainder of 2020, but seeing that stabilization.

And into our projections for 2021, I think is the second quarter we were.

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Noting the incremental impact of co would as being quite high we saw some attenuation of that in the third quarter and that's encouraging.

At this moment, you know and on my Crystal Ball is cloudy on what's going on what's covered but at this moment, we would hope to continue to see that stabilization or perhaps a little incremental improvement in what's going on on the gross to net and profit sharing side as we go through the balance of the year.

Okay got it and then just just a quick one maybe for Ryan the 1.9 million upfront cash payment from Lin that that's something that'll flow through revenues in the fourth quarter that accounted for any somehow differently.

Yeah under GAAP, it will be accounted for differently and overtime.

Okay got it thanks for taking the questions, but cash is king so we're happy for the cats and.

Cash is king thanks for taking the questions.

Thanks very much.

Again, if you would like to ask a question. Please press star one on your telephone keypad.

We have no further questions I will now turn the call back to Jerry for closing remarks.

Thank you operator, and thank you all again for joining us today have a good day take care bye.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation you may now disconnect.

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