Q2 2019 Earnings Call

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

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

Following prepared remarks today by Jerry and Ryan We will open the call for questions.

Earlier. This morning, we issued a press release detailing our financial and operating results for the three months ended June 32019.

The press release is available on the news that investors page of our website at Recro pharma dotcom.

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 the spin out of our acute care business financial outlook, our ability to raise capital on terms acceptable to us.

Our ability to resolve the complete response letter issued by the U.S. food and drug administration on our new drug application for Ivy Meloxicam and the time frame associated with such resolution and our product development plans for other product candidates, including the results and timing of any future preclinical studies and clinical trials for such product candidate.

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 plan will may anticipate believe estimate upcoming should intend and other words of similar meaning.

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 operations sections of Recro pharma. Its annual report on Form 10-K for the fiscal year ended December 30, 120 team in any quarterly reports on Form 10-Q , which are now on file with the Securities Exchange Commission and are available on the Fccs website.

And the information we provide on this conference call is provided only as of the day of this call August eight 2019, 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.

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.

We may also discuss certain non-GAAP financial measures with respect to our financial performance for the three months ended June Thirtyth 2019, specifically it we may discuss operating income as adjusted which is operating income without the impact of <expletive> . Your number twos. Your one for Josh zero nine and the earnings before interest taxes, depreciation amortization and noncash stock based compensation or EBITDA as adjusted for our contract development and manufacturing organization or CDMO business.

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

These non-GAAP financial measures should be considered in addition to but not as a substitute for reported GAAP results included in our earnings release and to be discussed on this call.

We have included a reconciliation of operating income as adjusted and EBITDA as adjusted to the GAAP measures in the supplemental financial schedule, which has been made available on the news and investors page of our website at Recro pharma Dot com.

I would now like to turn the call over to Gerri Henwood Jerry.

Thank you Claudia and good morning, everyone. Thank you for joining us on today's call.

I'll begin today's call with and there will be a recent accomplishments within CDMO segment.

I'm pleased to announce that the manufacturing business continues to outperform generating second quarter revenues of 31.3 million, a 44% increase compared to the second quarter of 2018.

For the six month period, the CDMO business generated 56.3 million in revenue.

A 36% increase from the comparable six month period in 2018.

We're very happy with year to date sales performance and the trajectory continued year over year growth.

Given the strong first half results.

Organic growth from existing customers.

A new business prospects, we are raising our 2019 full year CDMO revenue guidance.

From 85 to 87 million to an anticipated 91 to 94 million.

Turning now to the acute care segment.

As many of you know in March we received the second complete response letter from the U.S. food and drug administration.

For our new drug application seeking approval for intravenous meloxicam.

Non opioid preferential Cox two inhibitor for the management of moderate to severe pain.

The second CRL focus also on duration of Ivy Meloxicam knitting. If these units at the late onset fail to meet prescriber expectation for IP pain drugs.

This year also decided that he is concerned about the role boggy more came as monotherapy in acute pain, given the fts interpretation of the clinical trials data as well as how would meet patient and prescriber needs in that setting.

We continue to pursue FTC approval for I'd be more Kim.

As well as evaluate other possible corporate structures, including a plan to spin out the acute care segment and have the CDMO business and the acute care business has two separately traded public company.

Oh, we see the second CRL, we reduced operating expenses of the acute care segment, including a reduction in staff of approximately 50 employees.

The head count reduction did not impact employees and the CDMO segment.

We believe this initiative will significantly reduce the 2019 planned cash burn and we anticipate becoming cash flow positive in the second half of 2019.

With that I'll now turn it over to Ryan. Thanks, Jerry Good morning, everyone. Since we issued a press release and our Form 10-Q earlier today outlining our full financial results I'll just review some of the key second quarter highlights.

As of June Thirtyth, 2019, regret had cash cash equivalents and short term investments of 32.4 million.

Revenues and cost of sales were 31.3 million and 14.1 million respectively for the second quarter of 2019, compared to 21.7 million and 12.1 million for the second quarter of 2018.

The increase of 9.6 million in revenue was due to increased royalties recognized from two of our commercial partners an increase in product sales to one of our commercial partners.

Cost of sales increased primarily due to expansion of our services and development capabilities as well as growth in manufacturing demand, which was partially offset by operating efficiencies that we gained as a result of higher production volumes.

Research and development expenses for the quarter second quarter, 2019 were 7.2 million compared to 10.2 million for the second quarter of 2018, excluding the $2.6 million of costs associated with the strategic restructuring initiative recorded in the second quarter of 2019. The decrease of 5.6 million was primarily due to a decrease in pre commercialization manufacturing cost for IB Meloxicam.

Shifting the focus of our CDMO formulation and development capabilities to cost of sales activities a decrease in development cost for other pipeline products and a decrease in personnel costs [laughter] general administrative expenses for the second quarter of 2019 were 10 million compared to 13 million for the second quarter of 2018, excluding 3.4 million of cost associated with the strategic restructuring initiative recorded in the second quarter of 2019. The decrease of 6.4 million was due to a reduction in commercial team personnel and related costs. Following the sea euro which suspended our preparation of the anticipated launch of Ivy Meloxicam for the second quarter of 2019. The company reported a net loss of 2.8 million or 13 cents per share compared to a net loss of $12.7 million or 62 cents per share for the same period in 2018.

For the six months ended June Thirtyth, 2019 revenues and cost of sales were 56.3 million and 28.5 million, respectively, compared to 41.3 million and 22.6 million for the same period in 2018. The increase of 15 million in revenue was due to increased royalties recognized from one of our commercial partners and increase in product sales to various of our commercial partners cost of sales increased primarily due to expansion of our services and development capabilities as well as growth in manufacturing demand, which was partially offset by operating efficiencies gained as a result of higher production volumes.

Research and development expenses for the six months ended June Thirtyth 2019 were $16.7 million compared to 18.6 million for the same period in 2018.

Excluding 2.8 million of cost associated with the strategic restructuring initiative recorded in the six months ended June Thirtyth 2019. The decrease of 4.7 million was primarily due to the shift the focus of our CDMO formulation development capabilities to cost of sales activities.

Decrease in pre commercialization manufacturing cost for Ivy Meloxicam and a decrease in personnel costs slightly offset by an increase in development costs for our other pipeline products prior to the second CRL.

General and administrative expenses for the six months ended June 32019 were $24.2 million compared to 22.5 million same period in 2018, excluding the 4.4 million of cost associated with those strategic restructuring initiative recorded in the six months ended June Thirtyth 2019. The decrease of 2.7 million was due to decreases in commercial team personnel and pre commercial consulting costs incurred for the anticipated launch of Ivy Meloxicam. Following the receipt of the second CRL. These decreases in costs were offset by increases in costs associated with the debt financing earlier in the year public company costs, including legal fees business development costs, and our CDMO segment as well as increased professional fees associated with addressing the first and second CRL issued by the FDA regarding our end da for Ivy Meloxicam.

For the six months ended June Thirtyth 2019, Brinker reported a net loss of 4.8 million or 22 cents per share compared to a net loss of $25.2 million or $1.27 per share for the comparable period in 2018.

As Gerry mentioned earlier, we are increasing our revenue guidance for 2019 from 85 to 87 million to an anticipated 91 to 94 million. We're also increasing our CDMO operating income from 28 to 30 million to 35 to 39 million and CDMO EBITDA as adjusted from 38 to 40 million to 44 to 46 million. These are based on our current trends, including organic growth from our existing customers and new business prospects of these projections are based on our current CDMO business trends, including organic growth from existing customers and new business prospects. This guidance also takes into consideration existing contracts and timing of customer order patterns as well as re grows experience with customers product market estimation.

I'll now turn the call back to Jerry for closing remarks Terry.

Thanks, Ryan in closing we're pleased with the continued success of our CDMO segment in 2019 and confident that the Recro Gainesville team will continue executing on their objective to keep that business strong.

In the acute care segment. Despite the recent challenges we remain steadfast in our belief that I'd be more cam holds significant potential as a treatment option for moderate to severe pain.

In multiple acute clinical settings, and we remain committed to pursuing FDA approval for IP meloxicam.

We also believe that the value of the CDMO is not reflected in our current market cap.

And as a portion of trying to bring this to recognition we plan to spin out the acute care segment and have the CDMO business and the acute care business.

Two separately traded public company.

Thank you for your time and attention today.

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

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

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Our first question comes from Leland Gershell of Oppenheimer. Your line is open.

Hey, good morning, Thanks for taking my question and that's on the on the Great progress.

Excellent couple of questions on the CDMO wanted to ask about the nature of the of the newer business in terms of manufacturing in the <unk>.

In the old facility versus what may be more sort of already.

Focused work in the a and the 24000 foot and also wanted to ask about to what extent you see the new business shifting your dependence away from what's historically been a couple of 'em depends on a couple of customers to what may be a broader spectrum of.

Clients kind of a follow up thanks.

Thanks, Bill and so it's a good question and you know no shockingly given the substance of the business that we have had and continue to see is a long term sticky business that is the commercial business that is in the two primary Gainesville plant.

That accounts for the majority of revenue and revenue growth. However, there is a growing contribution of new business to the mix and we anticipate as we've described several times to you and to others, whose business opportunities often start early and getting in early often means that you're doing things that are not huge individual economic value better part of projects that can roll forward and continued to gain ground and scope as projects continue. So we have what we were very encouraged by in terms of new business. It is contributory, we think over time, it's going to be more and more contributory. In addition to a growing base of proposals and wins of proposals that the business development group has been working very hard to accomplish.

[noise] alright. Thank you and then in terms of the the spin out plan. So it sounds like that's that's a officially.

Decided that at this point in terms of.

That that being what you're going to do I wanted to ask about any thoughts on the timing of that and how that.

Some of the mechanics of that and how that will occur.

Whether that will be you know in the next few months will be next you know your events, how we should think about how that plays out. Thanks.

Yeah. So I mean, obviously, we would be interacting with U.S.C.C. So we are not in total control of the timeline, but would anticipate.

Ah that this is something that would be happening in 2019.

All right great well, thanks for taking the questions. They actually are.

Our next question comes from David Amsellem of Piper Jaffray. Your line is open.

Hi, Good morning. This is.

Hey, David.

David Thanks for taking the question.

First can you remind us how much.

Capacity you have available.

The game.

As long as the newer facility.

And then second.

The planned two.

Following the spin out still develop Ivy meloxicam internally or are you still considering finding a commercial partner and at a high level can you describe the extent, which you've had discussions with potential partners already.

Uh huh.

Sure. So we'll start with is the Gainesville questions. So the capacity in the Gainesville plant.

We would estimate to be approximately 66% to 70% utilization on one shift that facility has traditionally run two full time shift so there's quite a bit of additional capacity available for growth with new business.

In addition to that if we look at the RGB facility as we called the quality that's nearby but not on the campus of the main Gainesville facility, the new business facility development and a high potency. We're still in the early phases of utilization. So there is a lot of capacity, we would estimate that we're somewhere in the depending on how you look across individual functional areas for services, where between 10 and 20% utilized so there's a lot of room for growth in that space and it's one that has shown very well with clients. So we anticipate that we will continue to get good reception to that and good proposal win from that.

If we then move from there to Ivy Meloxicam. So.

We continue to be pursuing the appeal were doing that directly using outside expertise in terms of following through the appeal with regulatory legal advice as well as other special experts that help in that process. We have not made a determination on finally on what we will do with the product.

As we finally get approval certainly we see is viable options either partnering we had several parties interested in partnering the product prior to the second CRL, so that could be an option could provide some needed capital back to the business and on the alternative side, depending on what the mix of products that we might have at that point in time.

Could be possibly an asset that we would pursue on a more limited scale of commercialization than we had been previously thinking.

We are actively looking for other products, particularly commercial products that could with a modest sales force.

Be economically successful we have a team that's had good experience in that regard in the past and live like the opportunity to pursue that we are in active discussions, but we don't have anything in hand at this time.

Okay. That's helpful. Thank you.

Thanks, a bunch.

As a reminder, if you'd like to ask a question. Please press Star then one.

Our next question comes from Patrick to show a fair <unk> capital markets. Your line is open.

Hi, Good morning. This is actually Irish law on for Patrick So regarding the separation of the CDM all from the acute care business can you tell us about a little bit more I felt the capitalization of both.

Hi, Ben.

So at this moment in time I can't give you the detail on that I can tell you that the vast majority of the cash would stay with the CDMO and that would be staying in the RTP structure as the acute care would be spinning out you know in terms of who stays resident in the current structure and he will go to a new corporate structure, there would be a modest amount of support coming from the parent company to allow for the continuation of the appeal and walks camp and some basic corporate costs that would be incurred and being a public company.

Over time, as we get closer to that moment, we will be able to get more explicit.

Hi, Thank you I hope that's helpful.

Yes, and then another question regarding the agreement with Teva on.

They're up to now so can you tell us if we're also known as the sole Tata that's popular six year contract with Teva or if there are other products that include it.

And also secondly, historically the agreement all dropped an old renewable on the year to year basis. So I'm just wondering what participated the change to a long term contract or why does not being done before and why did it change in the latest extension. Thank you.

So.

With with Teva in Nebraska Mill agreement that is the only product that is covered under that agreement as you'll recall, we own the N.D.A. for that product. So Teva is our.

Marketing and distribution partner.

Historically that was a year to year customer they could theoretically walk, but they couldn't walk with the product because it's our anda our product obviously, there's been improvement in the market place and both they and US were interested in walking into a long term agreement. They have continued to do a tremendous job with that product expanding distribution channels from from activists to Watson and now Teva.

So we have a very good relationship with them and we're excited to have them as a long term partner.

Thank you.

Thank you.

And we're showing no further questions I will turn the call back over to Jerry for closing remarks.

[noise]. Thank you very much operator.

[noise]. Thank you all for joining us here today Weve been very happy to report these positive results and developments for both of our business segments wish you all very good day take care.

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