Q4 2020 Recro Pharma Inc Earnings Call
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Good day, ladies and gentlemen, and welcome to the retro for quarter and year end 2020 financial results Conference call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time as a reminder, this conference call maybe recorded.
I'd now like to hand, the conference over to Stephanie Diaz of Retro Investor Relations Group. Please go ahead.
Thank you Hello, and thank you for joining us on today's call, we have David and low President and CEO and Brian Lane, Chief Financial Officer.
Today, we will be providing an overview of re gross contract development and manufacturing business, including updates on corporate activities and financial results for the year ended December 31 2020.
After our prepared remarks, we will welcome your questions before we begin I would like to caution that comments made during this conference call. Today February 26, 2021 will contain certain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995 concerning the current beliefs for the company, which involves a number of assertion risks.
And uncertainties actual results could differ from these statements and the company undertakes no obligation to revise or update any statement made today.
I encourage you to review all of the Companys filings with Securities and Exchange Commission concerning these and other matters with that I will turn the call over to David and low <unk> President and CEO.
Thank you Stephanie and thank you to everyone, who has dialed in and to those who are participating today via webcast.
I'm very pleased to join you all for my first earnings call as re gross president and CEO.
Before I begin I'd like to apologize for rescheduling our earnings call. We had initially planned to issue earnings yesterday Thursday February 25th However, our webcast hosting company requested that we reschedule due to a lack of bandwidth on our preferred day, hence the move to Friday, However, as everyone knows it's under.
Xyrem or <unk> to issue any news on a Friday post market. So when given the opportunity to move the call to Friday pre market, we decided to do just that we're sorry for any inconvenience. This may have caused we don't expect this to happen again.
And now I'll turn to re growth.
As was reported I joined the company in December bringing more than 25 years of experience, leading biotech drug development and GMP manufacturing organizations, most relevant I have experienced leading building and growing multiple <unk>.
This background and lens to re grow opportunity was immediately attractive to me upon first evaluating re grow I was struck by the facility's capabilities and the Companys exceptional team and manufacturing and compliance track record.
Most compelling was the opportunity for significant growth in.
And after my first two months at re grow I'm pleased to report for my optimism for the future of this organization has grown I'm very happy to be at the helm of this promising company and I look forward to reporting our progress in the months ahead.
Turning now to the prior year.
2020 was a challenging time for re growth variability in customer ordering patterns, a critical change in a competitor's production output and the COVID-19 pandemic all impacted our topline revenues as well as margins since horizon, arriving at re grow.
My priority has been to carefully evaluate our organization's vulnerabilities develop a strategy to achieve sustainable growth for the company and to build a leadership team capable of executing we have made great strides with each of these efforts in the recent months and I will provide additional details on these achievements following an O.
<unk> of our year end financial results for that I will turn the call over to Ryan.
Thank you David Good morning, everyone before I begin in addition to the brief financial overview I will provide on the call today additional details on our fourth quarter and year end 2020 financial results are included in our press release issued prior to this call and in our form 10-K, which was filed today.
With the SEC.
I will now provide an overview of our financial results from continuing operations for the full year 2020.
Revenues for the year ended December 31, 2020 were $66 5 million or $32 7 million decrease compared to revenues of $99 2 million recorded during the prior year.
Decrease was primarily due to the loss of a rapid mill as our market share by our commercial partner in the first quarter of 2020 due to the reentry of a competitor whose production has been taken offline in 2019 and shifts in customer ordering patterns during fiscal 2019.
It is important to understand that because of this competitor's facility going offline in 2019, our <unk> revenue had increased dramatically now that this competitor is back online we have seen our commercial partner state sustain its pre 2019 market.
For <unk> XR capsules since the end of the first quarter of 2020. Additionally, the COVID-19 pandemic has resulted in decreased end user demand inventory rebalancing by our commercial partners and slower than expected clinical trial materials New business starts in addition revenue.
Decline due to the discontinuation of two commercial product lines by our commercial partners higher revenues from our new business growth activities has partially offset the decrease including a significant new commercial product Tech transfer project cost of sales for the year ended December 31, 2020 was 54.
$1 million compared to $51 million for the comparable period of 2019, the increase of $3 1 million was not proportionate to the decrease in revenue primarily due to lower commercial manufacturing volumes and the related impact on fixed cost expense through cost of sales despite making reductions.
And the work force and implementing cost savings measures cost savings generated from these activities are expected to continue into 2021.
Further contributing to cost of sales was increased costs on higher clinical trial materials new business revenues.
Total SG&A expenses for the full year, 2020, or $18 1 million a decrease compared to $19 9 million reported in 2019. The decrease of $1 8 million was primarily related to lower public company costs, which were partially offset by our new business development efforts and the addition.
Of the company's clinical trial support services to our early GMP centered offerings in the second quarter of 2020.
Interest expense was $19 2 million for the year ended December 31, 2020, consistent with $19 million for the comparable period of 2019. The increase of <unk> 2 million was primarily due to an additional term loan borrowing under the credit agreement was it there in the first quarter of 2019.
<unk> offset by a decrease in the LIBOR base rate of interest on our term loans under the credit agreement.
For the year ended December 31, 2020, the company recorded a net loss, including noncash charges of $26 7 million of 27 $5 million for $1 16 per diluted shares as compared to net income from continuing operations, including non cash charges of $18 5 million.
For $6 million or <unk> 20 per diluted share for the comparable period of 2019, the noncash charges of $26 $7 million in 2020 or associated with stock based compensation depreciation and noncash interest expense amortization and noncash changes in our contract am.
Asset.
The non cash charges of $18 5 million in 2019 were associated with stock based compensation depreciation and noncash interest expense amortization change in warrant valuations and noncash changes in our contract assets are cash and cash equivalents as of December 31 2020.
For $23 8 million compared to $19 1 million as of the end of the prior fiscal year finally.
I'd like to highlight an important subsequent events that has reduced the company's outstanding debt and strengthen its overall financial position.
Earlier this week, we announced the signing of an amendment to our existing credit facility with <unk> capital management.
Through the earlier Amendment, which was announced in Q4, 2020 Rico repaid $9 million of principal without penalty and favorably adjusted the agreements leverage ratios and liquidity parameters under the terms of the latest amendment the credit facilities outstanding debt balance has been further reduced from.
$116 million to $100 million and the interest rate governing the facility has been decreased by one 5%. Furthermore, there will be no additional principal amortization during the remainder of the term of the facility, which runs through March of 2023 and exchange for the reduction of the interest in a portion of the debt.
<unk> received $9 million in equity and re growth, which we believe demonstrates their support for our organization and the opportunity for growth our efforts over the past four months have resulted in re gross successfully delevering, a total of $25 million of debt from our balance sheet, and reducing our interest expense and allowing us.
To generate greater operating cash flow to contribute to continued strengthening of our balance sheet and executing on our growth plans. This concludes my financial overview I will now turn the call back over to David for an update on operations and achievements during the period.
Thank you Brian.
As I stated in my initial comments I believe there is a significant opportunity for growth for re growth.
During my first few months at <unk> I have been focused on evaluating the companys assets customers' processes and team in order to best position the organization for sustainable growth and leadership in the CDU most sector.
Strategy that we have begun to execute as for key components, expanding and diversifying re gross customer base strengthening our balance sheet position in order to better support both organic and inorganic growth.
I've mentioned, our leadership as well as restructuring our operational organization.
And continuing the upgrade and expansion of our facilities and capabilities to support clinical stage projects, while expanding commercial programs on high value technology transfers and validation.
I will first discuss our efforts to expand and diversify our customer base.
In 2020 re gross revenues were negatively impacted by a slowing of sales for several commercial products. Indeed.
Indeed independent pharma market tracking reports have shown COVID-19 related sales decreases across most therapeutic categories.
To mitigate this type of variability in vulnerability. It is imperative that re grow increase the number of customers, we have as well as the types of customers. We service to that end in the second quarter of 2020 re grow out in clinical trial support services to its early GMP centered offerings to augment our existing.
<unk> customer portfolio.
This business is nascent but we've been successful in the past few months.
Building our visibility in this segment and onboard in multiple clinical stage customers.
While this new business represents a high value revenue channel for re growth our core commercial business remains strong and we continue to pursue opportunities to further support our existing customers to continue this trajectory we've been augmenting our business development team to ensure we are best positioned to identify the types of.
Grams were recruited from partner to create the best value for our customers and ourselves.
Another important element of customer growth and diversification requires that we continue to win new customers with commercial stage projects. Historically. This has been re gross sweet spot and we were recently awarded a commercial project for a branded product by a Japanese pharmaceutical company to continue this momentum we have increased our.
Net to our business development efforts in this area.
And finally, it is critical that we maximize the revenue opportunity from each relationship.
Existing customers represent one of the most valuable growth channels in the <unk> business.
As a customer initiated development of a new molecule advances programs through clinical development <unk> spans commercial sales. It is our goal to best position re growth to be the CD Moe choice at every stage at present nearly half of our existing customers.
Have expanded or are in the process of expanding their programs beyond the initial scope of work.
The second component of our strategy is to strengthen our balance sheet in order to be better positioned for both organic and inorganic growth as Ryan mentioned, a few moments ago. We were very pleased to announce earlier this week that we significantly and favorably restructured the debt instrument with our finance partner a theory.
This restructuring was an important step in strengthening re gross financial status, an important factor in attracting new customers.
The third prong of our strategy is to augment our organization both in terms of meaningful <unk> experience as well as a structure for success. Since I arrived a few weeks ago. We have brought C. D. M O specific strength to our leadership team as well as our technical staff. This includes the appointments of Jim Miller a highly.
Regarding C D M. A thought leader to our board and Ryan Lake as our dedicated CFO. We also reorganized our operational leadership structure to streamline our efforts optimize efficiencies improve our project management competencies and ensure the strong management and quality practices, we have in our.
Marshall business are equally deployed across the growing clinical trial materials and related services business.
Finally, the fourth prong of our growth strategy focuses on the enhancement of our facilities and capabilities.
Hand in hand, with our plan to service an expanding customer base, we are committed to putting the systems and processes in place to support a broad development and manufacturing portfolio.
Over the past couple of years to new manufacturing suites have been constructed and commissioned to support the technical transfer and planned validation activities for several new customers projects. We're pleased to report that the analytical transfers for these programs have been successfully completed and validation batches will begin in March.
While 2020 was a challenging year <unk> has a new leadership, a new strategy for growth and a renewed focus as we now operate from top to bottom with the sole purpose of being a reliable trusted CMO partner to our customers. We are executing are calculated and comprehensive strategy.
<unk> that we believe will strengthen every part of our business. We believe we will increase top line revenue by servicing a larger customer base, we hope to lessen period to period revenue fluctuations by expanding our service offerings and diversify our customer base.
We've enhanced our facilities to better accommodate earlier stage highly potent and high value projects, we have increased our commitment to marketing and business development to build our visibility and reputation within the sector and.
And to bring this all together, we have strengthened our leadership and improved our organizational structure to facilitate optimal operations efficiencies and communications.
Looking to 2021, we believe these efforts have already had a positive impact as we expect revenues for Q1 2021 to trend upward increasing by approximately 65% to 70% over Q4 2020.
And for the full year of 2021, we expect to outpace the overall small molecule <unk> industry growth rate.
We look forward to updating you again in the near future.
This concludes my prepared remarks for today, we can now open up the call for questions.
Greater.
Thank you.
Minder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.
Our first question comes from Matthew <unk> with Craig Hallum. You May proceed with your question.
Good morning, and thank you for taking the questions I think moving the call to the morning was much much better plan.
First off how much air is it possible to parse out the Q4 results how much of that impact was a rebalancing by customers versus another spike in the pandemic at the time versus the competitor and for rapid mill coming back on is there a way to kind of delineate what the impact was.
For those three pieces.
Yes. Thanks for the question Matt This is David.
The first part I'm going to defer to Orion to answer the detail on that but I do want to make sure.
We think about the impact of timing of new business creation, where anything that we've seen happening in Q4 from a revenue perspective.
By and large impacted by decisions made by customers far earlier in the year right. So April May June July which was the very beginning of the Covid shutdown if you will.
That's when a lot of programs were put on hold and just due to the uncertainty there were a lot of decisions deferred and so those decisions being deferred resulted in delayed responses and contracts and therefore.
Lower revenue in the new business.
As Ryan to color on your more specific question about the difference in the different areas and the impacts.
Yes, Thanks, Matt for the question. So as you are aware we had a notable benefit in 2019 from one of our customer competitors.
Being the RAF mill products that they were out of the market due to manufacturing issues and with that competitor reentering. The verapamil sustained release market in 2020 does it cause you know notable volatility in our quarterly revenue due to the continued rebalancing.
<unk> of inventory by that customer of really inventory that they had ordered in 2019. So.
We experienced that throughout <unk>.
2020.
This volatility certainly was further exacerbated by Covid.
We believe in 2021.
Quarterly revenue volatility should be much less than we experienced in 2020, and we expect to see.
Sequential quarter over quarter revenue growth from Q4, 2020 to Q1 2021, as David had mentioned in the 65% to 70% range.
We are tracking.
And our expectations right now are that our full year revenue growth.
It would be in line with kind of industry norms for the small molecule <unk> I'd also say.
We've commented in the past is that as it relates to the fourth quarter, we typically observe patterns, where the fourth quarter. Our customers have tried to lighten up their inventory levels at the end of the year and then replenish those stocks after year end. So based on the visibility that we have in our customer forecast right now.
Into the first half for 2021, we are seeing that stabilization of anticipated manufacturing volumes in our projections for 2021.
As I've commented on prior calls I think in terms of the magnitude.
The large.
Factor as it relates to our overall revenue decline certainly was related to our rapid mill products.
And the impact that it had from over 2019 due to that competitor being out of the market I would say about two thirds of our revenue decline was associated.
With the <unk> mill products and of that kind of two thirds I'd say.
About two thirds of that was associated with.
The competitor and then probably in the 10% to 20% range as it relates to <unk>.
Covid impact.
Hopefully that answers your question Matt.
Very helpful. Thank you.
And then in the prepared remarks and in the press release, you mentioned that the validation batches for the tech transferred product.
It will be started here in March.
Is that.
Is that the last step in the process I would I think those are what 90 30, 60 90 day batches. So by Q3, you could potentially be generating revenues are.
Growing the revenues from that that new product.
I think right now we're targeting 2022 for commercial revenues from that product.
Okay, Alright, and then maybe one last one and I'll hop back into queue.
But with the the vaccine is being doled out and a general reopening schools coming back online students going back to class all those types of things.
What are you seeing from a script volume perspective, what are you hearing from customers are they coming back to the table after the pause.
Last year, and what is how does that kind of factor into your expectations for the upcoming year. Thank you.
Thanks Al. This is David again, I'll answer that from my perspective and that is.
A year ago, almost a year ago, when things really came to a grinding halt, especially on new programs clinical studies.
Areas like that.
All of that came to a halt because of the inability for clinical trials to be safely conduct Ed you had hospitals, where immuno compromised patients for going in for clinical studies and they were sharing always in.
And trees and everything else with the Covid crisis, and that's all been re Inc.
Invented I would say and so the capital that's been raised to fund.
So many programs over the past two and three years and as you know record capital is being deployed.
That has that had been parked for a while and these programs. We now see big picture Wise, we see a lot of those clinical studies starting to open back up in those programs going forward. So certainly we expect the sales funnel on new business opportunities for non commercial programs.
To increase.
And al Ryan has.
Some information on the scripts volume sides, so I'll ask them to color on that side.
Yeah, Thanks, David So.
We were just reviewing.
Third party.
Industry report.
Was provided and there is a billion dollar per 1 billion GAAP in diagnosis visits compared to the prior year. So it's down 30% and overall the prescription volumes are still down in the mid to high single digit range.
As we've commented before specific to the drugs that we manufacture in particular in the cardiology space overall scripts in the cardiology space are down 18% year over year in pediatrics or down 34%. So generally speaking I would say that the products that.
We manufacture are not being impacted as severely as the specialty category declines.
So that's a positive for us and certainly as Covid.
Hopefully continues to abate, we would be able to see.
<unk>.
The benefit from that.
Got it thank you very much.
Thank you and as a reminder to ask a question you will need to press star one on your telephone. Our next question comes from Jacob Johnson with Stephens. You May proceed with your question.
Hey, thanks.
Maybe one question on 2021 I appreciate the guidance outpaced the small molecule industry, but can you walk through the puts and takes for 2021, maybe remind us.
Of any headwinds you're facing which I think may be include some of those discontinued drugs and then maybe hit on the key growth opportunities in your portfolio in 2021.
Yes.
Yes, so thanks for Jacobs for the question I would say.
From a R.
Our core commercial business.
We are expecting to see some stability.
As it relates to the impact that we saw in 2020.
Don't don't forget and recall that we did have two product discontinuation.
We expect that.
Create.
$5 million to $7 million headwind certainly for us, but we are expecting to see growth.
Our new business development clinical trial materials business.
That will help.
It helped to offset.
Those decreases.
The primary drivers and then obviously.
As the market stabilizes for our customers we would expect.
That could be impacted as well and some of the profit sharing results.
Got it that's helpful. Thanks for that Ryan and maybe David a follow up on that I think.
The clinical trial material offerings was a key growth initiative for the company enter Jerry I'd just be curious about your thoughts on on that business line.
Yes, it remains.
Our priority and an area of growth for US we think it's important to.
Be able to extend our product portfolio to not just late stage commercial products for late product lifecycle commercial products, but also to <unk>.
Strength in our pipeline by having a portfolio of earlier stage programs we support.
We're seeing a growth in that activity have added a lot of new customers.
<unk>.
And ever increasing level of conversations that we're having with with new possibilities, there as well and importantly, we.
Reoriented, our business development teams to where we've brought in.
Individuals' specific geographies with that experience, where they've been focused historically on those.
Types of projects and programs and I think that that's going to begin to bear fruit as well.
Got it that's helpful. And then maybe last question and maybe it's too soon on this but I'll ask it anyways.
David Youre, a four pronged strategy includes inorganic growth.
Can you talk about what capabilities you might be interested in adding one day to retrace portfolio.
Yeah.
<unk>.
A little early.
But.
Certainly I'll say this we re grow is <unk>.
Screamingly good at what we do in the space that we operate in in terms of complicated formulation challenges and the ability to deliver.
Robust amounts of commercial product on.
On time in full and so anything we look for Inorganically that standard has to be maintained.
And so certainly as we step ourselves forward, we will be looking into.
The opportunities that are adjacent.
Lately or at least two steps adjacent so that we can keep that base of knowledge to remember we've got.
Three decades of manufacturing.
Expertise regulatory and quality confidence.
On the foundation of this basically newly Reoriented entirely externally focus from top to bottom customer facing C. D M O and.
So I don't want our inorganic activities to distract from what we really provide.
In an excellent way on a consistent basis. So those are my parameters and.
We remain active in an open and looking for those sorts of opportunities.
Got it that's helpful. Thanks for taking the questions.
Appreciate it.
Thank you and I'm not showing any further questions. At this time I would now like to turn the call back over to David and low for any further remarks.
Thank you to everyone participating on today's call and webcast as I hope is evident I'm very happy to be part of the <unk>. Most importantly, I'm excited with the significant opportunity that lies ahead.
So I've been here only a short time day plans, we've put in motion are already beginning to pay off before signing off I'd like to thank our investors for their continued support most importantly, I'd like to thank the entire <unk> team of employees, who truly are re gross most valuable asset.
Those are the entire team's commitment to our customer success and to providing high quality products on time and in full I have every reason to be optimistic about re gross future. Thank you again for participating today and for your continued support of re growth.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
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