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Recro Pharma Inc (NASDAQ:REPH)
Q4 2019 Earnings Call
Mar 4, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Recro Gainesville Full-Year and 2019 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded at the Company's request.

I would now like to turn the call over to Claudia Styslinger, Investor Relations. You may begin.

Claudia Styslinger -- Investor Relations

Good morning, and thank you for joining us on today's conference call to discuss Recro's year-end 2019 financial results. This is Claudia Styslinger, and I am joined today by Gerri Henwood, President and Chief Executive Officer; and Ryan Lake, Chief Financial Officer. Following prepared remarks today by Gerri 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 full-year ended December 31, 2019. The press release is available on the Investors page of our website at recrogainesville.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 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 any 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 requirements and manufacturing plans; customer and prospective customers decisions to move forward with our manufacturing services; average profitability, or mix, of the products we manufacture; or customers facing increasing or new competition. The 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 in the Management's Discussion and Analysis of Financial Condition and Results of Operations sections of Recro Gainesville's Annual 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 the SEC's website.

Any information we provide on this conference call is provided only as of the day of this call, March 4, 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.

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 full-year ended December 31, 2019. Specifically, we may discuss the earnings before interest, taxes, depreciation and amortization, or EBITDA, as adjusted, for our contract development, and manufacturing organization or CDMO business. We believe this non-GAAP financial measure is helpful in understanding our CDMO business as it gives investors greater transparency into the supplemental information used by management in evaluating the financial performance of our CDMO business. This non-GAAP financial measure 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 EBITDA, as adjusted, to GAAP measures in the supplemental financial schedule, which has been made available on the Investors page of our website at recrogainesville.com.

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

Gerri A. Henwood -- President and Chief Executive Officer

Thank you, Claudia, and good morning, everyone. Thanks for joining us on today's call. This is our first earnings call since becoming a pure play CDMO, and I'm pleased to discuss Recro's achievements for 2019. The Company has completed several important corporate initiatives that we believe are integral to our future growth and success.

With respect to our financial performance, our full-year 2019 results met upgraded guidance as we generated $99.2 million in revenue, setting a new annual revenue record. Ryan will cover the financial results in more detail in just a few minutes. As we stated previously, we achieved consolidated operating profitability during the third quarter of 2019, which was earlier than expected and the Company then remain cash flow positive through the end of 2019. Looking ahead into the first half of 2020, we expect this trend to continue.

On the corporate front, we completed the separation of the Baudax Bio business from Recro in late November of 2019. This initiative was implemented to build upon the strength and commercial success of the CDMO business, while providing additional opportunities for future growth. The new spin out company, Baudax Bio, began trading on the NASDAQ Capital Market on November 21, 2019, under the ticker symbol BXRX. The Recro Board of Directors has declared a special dividend distribution of one share of Baudax Bio common stock for every 2.5 shares of Recro common stock held.

We implemented this separation because it allows us to direct the entirety of Recro's cash flow and other resources back into the CDMO business with the goal of continuing to execute on our existing customer contracts, secure new customers, and ultimately grow revenue. I would personally like to thank our shareholders, our Board of Directors and everyone at Recro Gainesville for their dedication and for the hard work of the team, which led to another great year.

With that, I'll turn the call over to Ryan for the financials. Ryan?

Ryan D. Lake -- Chief Financial Officer

Thanks, Gerri. Good morning, everyone. Since we issued a press release and our Form 10-K earlier this morning outlining our full financial results, I'll just review some of the key highlights. As of December 31, 2019, we had cash and cash equivalents of approximately $19.1 million. Because the Acute Care business is presented as a discontinued operation as of December 31, 2019, the Acute Care business' results are excluded from our continuing operations for all periods presented. Revenues generated from our contract manufacturing division for the full-year of 2019 were $99.2 million, compared to $77.3 million for the full-year 2018. This reflects a 28% increase year-over-year. The increase of $21.9 million in 2019 revenue versus 2018 revenue was due to increased royalties recognized from one of our commercial partners and an increase in product sales to various commercial partners.

For the full-year 2019, operating income from continuing operations, operating income as adjusted, and EBITDA as adjusted, were $23.6 million, $32.3 million and $49 million, respectively.

Cost of sales for the full-year 2019 was $51 million, compared to $43.2 million for 2018, which increased primarily due to product mix and expanded service and development capabilities, as well as growth in manufacturing demand.

There were no research and development expenses for the full-year 2019, compared to $4.4 million for 2018. The decrease of $4.4 million in 2019 primarily resulted from the inclusion of such costs and cost of sales in 2019 rather than research and development due to the change of focus of the personnel to revenue-generating activities.

Selling, general and administrative expenses for the full-year 2019 were $19.9 million, compared to $14.4 million for 2018. The increase of $5.5 million was primarily due to higher public company costs, including corporate initiatives, which increased by $4.1 million to $16.3 million for 2019, compared to $12.2 million for 2018. The remaining $1.4 million increase was driven by higher business development costs as we expanded our sales team in various geographies in anticipation of business growth from new formulation and development capabilities.

Net interest expense for the full-year 2019 was $19 million, compared to $8.1 million for 2018. The increase in net interest expense was due to higher principal balance on our Athyrium senior secured term loan and amortization of the related financing costs.

For the full-year 2019, Recro reported net income from continuing operations of $4.6 million, or $0.20 net income per diluted share, compared to a net loss of $13.1 million, or $0.64 net loss per diluted share for 2018. Including the impact of discontinued operations, we reported a net loss of $18.6 million, or $0.79 net loss per diluted share for 2019, compared to a net loss of $79.7 million, or $3.90 net loss per diluted share for the comparable period in 2018.

Moving on now to our financial guidance. For 2020, we expect revenue to be in the range of $97 million to $100 million depending on market dynamics, contracts, timing of customer order patterns, accuracy of our customer product, market estimations, new market entrants and success and timing related to business development activities. We expect our operating income to be in the range of $21.3 million to $25.3 million and operating income as adjusted to be in the range of $27.3 million to $30.3 million. We also expect our EBITDA as adjusted to be in the range of $47 million to $50 million.

I'll now turn the call back to Gerri for closing comments. Gerri?

Gerri A. Henwood -- President and Chief Executive Officer

Thanks, Ryan. Looking ahead to 2020, we see a highly productive year for Recro, as we continue to focus on the further growth and development of the CDMO business, we believe we've set the stage for future commercial and corporate success. In the meantime, we are focused on delivering exceptional service and quality to our customers, partners, and we look forward to this impacting our shareholders in a positive way as well in the years to come. We've had an eventful start to 2020 and we look forward to maintain the positive momentum we have created.

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

Questions and Answers:

Operator

That concludes our prepared remarks. We will now open the call to your questions. [Operator Instructions] Our first question comes from Esther Hong with Janney. Your line is open.

Esther Hong -- Janney Montgomery Scott LLC -- Analyst

Hi, good morning. So thanks for taking my questions.

Gerri A. Henwood -- President and Chief Executive Officer

Good morning. Sure.

Esther Hong -- Janney Montgomery Scott LLC -- Analyst

Good morning. First, so can you speak about 2020 revenue guidance and then expectations of growth versus 2019 revenue that was reported this morning? And then I've got a follow-up.

Ryan D. Lake -- Chief Financial Officer

Hi, Esther. Yeah, sure. Thanks. So, the CDMO business continues to be very strong and performed very well for 2019, obviously, achieving $99.2 million in revenue, which represented a 28% growth and the operating income from continuing operations represented 89% growth from the prior year and EBITDA of $49 million was 52% growth over the prior year. So we think this business is performing very strong. We have industry-leading EBITDA margins and all while continuing to invest in scale to really support our future growth. You saw that really beginning in 2017 and more dedicated in 2018. We began investing several million dollars in our formulation and development capabilities and our new business development efforts, and we're really excited about the anticipated new business development growth efforts.

As we think about the guidance -- revenue guidance for 2020, we are expecting to see a shift in revenue mix in 2020 from 2019. Our base business -- core business, which you'll recall, in 2019, was strengthened by us locking into long-term relationships with our core commercial customers, including a five-year deal and a six-year deal with Novartis and Teva, respectively, as well as extending the relationship that we have with Lannett and improving the economics that we had under that agreement. So, our base business in 2019 really saw a notable upside due to a competitor mile.

And with respect to Verapamil SR and PM products and they were only supplying the market on a limited basis and obviously, this resulted in an increase in purchases by both Teva and Lannett for us. And as they were essentially filling Mylan shortfall within the market, which resulted in higher manufacturing and profit sharing revenues for us. We are certainly hopeful or we were hopeful that Mylan wouldn't return to the market at a notable level, but it appears that they are supplying the market on a more consistent basis. We're not sure to what extent Mylan will come back into the market, but we expect to see some inventory rebalancing by Teva and Lannett in 2020. But with that said, we do expect to be able to cover that decline in the base business with increase in our new business development efforts.

And Gerri, I don't know if you want to talk about some of our new business development activities.

Gerri A. Henwood -- President and Chief Executive Officer

Yeah. So we had, as you know, had a goal to have a significant impact on new business commitments, new customers coming in, which we believe we achieved in 2019. The sales team that was available to do that under the guidance of our strong leadership in that area was successful and brought in a total backlog of just under $10 million in 2019. We are expecting to exceed that by a goodly percentage during 2020 that will contribute both to current period income, as well as to providing and hopefully, even more substantial backlog by the end of the year as we would go into 2021. So those are the parameters that we think are going to allow us to continue to grow.

We're also looking at some new business segments of emphasis for us within the CDMO business to complement what we're already doing things that would not require extensive or virtually any significant investment, very minor equipment, if any, and reduce existing personnel, but have some additional sales emphasis in addition to having added a couple of more very experienced sales persons to the team for 2020 as well. So that's why we're optimistic that growth will happen. I mean, you know us, we like to be -- do our very best to be solid and dependable with respect to guidance. We are -- that is what our belief is for the numbers that we put out. But our goal is always try to exceed these numbers.

Esther Hong -- Janney Montgomery Scott LLC -- Analyst

Right. Excellent. Great. And then just a follow-up. Can then -- can you speak about the quarterly cadence for revenue then for 2020? Thank you.

Ryan D. Lake -- Chief Financial Officer

Yeah. I mean, I think as we've talked about in previous quarters, we've observed patterns where there can be -- since we're not driving the end user sales in the market, it's really our customers. It really depends on what their inventory ordering patterns are and as we described earlier, we do think that both Teva and Lannett will be rebalancing their inventory based on some of the long-range customer forecast that we received. Although, there may be some conservative -- conservatism built into these estimates. We do expect that they will rebalance some of those inventories, which could mean that there could be some lower inventory or shipment quarters initially before, they work through that.

Gerri A. Henwood -- President and Chief Executive Officer

So, to move out as a sort a very specifics to that, I would just remind our investors that this is a lumpier business and if we were the direct marketers of these products, where you have an opportunity, it's a sort of directly influence what's going on quarter-to-quarter. The inventory we produce for customers is often three, six months ahead of its actual utilization in the field. And so, we do feel comfortable at this point in time with the guidance that we put out there, but we don't think it's going to be an easy quarter-to-quarter -- as it has been in past years, a bit lumpy, but we do achieve the annual guidance. So that would just be the framing I put on that.

Esther Hong -- Janney Montgomery Scott LLC -- Analyst

Okay. Great. Thank you so much.

Gerri A. Henwood -- President and Chief Executive Officer

Thank you, Esther.

Operator

Our next question comes from Leland Gershell with Oppenheimer. Your line is open.

Leland Gershell -- Oppenheimer & Co. -- Analyst

Hey, good morning and thanks for taking my question and thanks for sharing the additional color on the prior question. Just a further question in terms of your mix of bespoke R&D development services versus read out contract manufacturing. If you could sort of qualify, if not quantify, for us what that may look like going forward as you commit more resources toward business development on kind of the more bespoke services side? And how that fits within your current capacity underutilization in terms of potential for additional business? And then I have a follow-up. Thanks.

Gerri A. Henwood -- President and Chief Executive Officer

Sure. So, there sort of like three different tracks that we're looking at as we look at this business. One is, there are some tech transfers that we're working on, some are for smaller companies. And so, they'll come in and ultimately use some additional general commercial manufacturing capability that we have, but they won't be huge an impact in the early stages. There are some other projects that we're working on that we would hope to be able to announce sometime during 2020. There could be more substantial tech transfer, but I'd like to wait till this contracts are inked [Phonetic] to talk specifically about those. That's one track.

Then we have the -- what I call putting the seeds in the ground track, which are earlier projects for programs from well-funded companies that have more than one candidate typically in a clinical phase or about to be in the clinical phase, and for whom we're doing formulation work, analytical work, clinical trials, materials. Those are going to be growing we believe in 2020 based on the work that was signed in 2019 and the work that's currently proposed and pending final decision, even assuming a discount rate of what percentage of that business we get. That we'll begin to occupy more of the capacity in the RGD facility, the development facility. And over a period of, likely a couple of years, will become projects that would either go to registration batches or potential commercialization in the Gould facility.

The third track is looking at ways that we can use both of the facilities that we have to perhaps intensify our presence in a few other areas that would not, as I said, require much at all in the way of additional capital equipment investment but with leverage capabilities that we have currently, leverage personnel that we have currently, and allow us to do some work that could more fully utilize some of the capacities in Gould that are not straight manufacturing. For instance, certain types of packaging operations and similarly, in the Gould facility around potential clinical trials, materials packaging, additive to what we're already doing.

Leland Gershell -- Oppenheimer & Co. -- Analyst

Okay. That's very helpful. And then, with respect to the EBITDA margins, is there any way you can kind of qualify for us as you see the various streams of the business moving forward? Any directionality to those? Obviously, they've been strong and there has been improvement. I'm just wondering if you could provide any color on how you see those margins over time. Thanks.

Ryan D. Lake -- Chief Financial Officer

I think just adding to what Gerri had said, the growth rate of the commercial business, we expect our existing business to kind of be steady in the outer years. For the growth rate for the new business, we expect that to increase significantly, and we've made the investments for that to grow and that will really be the growth driver for us and the growth vehicle for us to drive utilization in the future. I think from a gross margin perspective, overall, we expected for 2020 to be in the low-40% range. The EBITDA as adjusted margins would probably be in the 40% range.

As we think about the volume in the Gould plant kind of being steady or slightly declining, the products mix change from commercial manufacturing revenues were the plant costs are remaining in line with volumes, as well as kind of an expected rebalancing or decline in the royalty and profit sharing mix, if that certainly contributes to higher margins and this is -- it's partially -- that, I guess, decline is partially offset by increasing margins on the R&D new business, which we expect would be in the 35% to 40% range is typically what we're targeting for a lot of those new business development revenue and customers. But keep in mind, those costs and those investments that we've been adding aren't yet fully absorbed. So, we do have a product mix kind of going on as I mentioned earlier, where we are also expecting to add additional cost within cost of goods sold to be able to continue to support our expected growth in the demand in those RNG [Phonetic] formulation and development activities.

Gerri A. Henwood -- President and Chief Executive Officer

I mean, bottom line, Leland, I think if you look at on a reasonably longer horizon more than 2020, we do expect to still have the opportunity to maintain very substantial margins comparative to a number of others because of the nature of the development services we're doing and the projects that we're doing in those areas are typically bid in a way that's compatible with industry norms but is on the higher margin side. If those go on to be commercial products in the Gould facility, they should continue to help keep those margins high as well. So the overall mix would stay very healthy, we think.

Leland Gershell -- Oppenheimer & Co. -- Analyst

All right. Thanks. I appreciate the detail.

Gerri A. Henwood -- President and Chief Executive Officer

Thanks, Leland.

Operator

Thank you. [Operator Instructions] Our next question comes from Jacob Johnson with Stephens. Your line is open.

Jacob Johnson -- Stephens Inc. -- Analyst

Hey, thanks for taking the questions. Maybe following up on that last answer, Gerri, if we think out longer term it sounds like 2019 really strong year. It makes for a tough comp in 2020. How should we think about the long-term revenue growth profile of the business sort of beyond the 2020 time frame?

Gerri A. Henwood -- President and Chief Executive Officer

Yeah. Good question. Thanks, Jacob, for asking. So I think as we look at the macro of the business, we know that some of the mature products will have a very modest, at least as we've seen in the past, change year-over-year other than this rebalancing associated with Mylan's possible reentry into the market. We think that we've taken that into account in our current guidance at some rational levels. And I think that the new business will sop up a lot of that gap that would have existed and then some -- I think as we look out further, we have the potential for a very substantial growth new business wise year-over-year as we get through the end of '20 and beyond because we've been building and investing and what we see in proposal volume and win rates and things like that, which we're not ready to give total granularity on, I'm sure you understand because it's still -- the mix is still shaking out but very positive signals. I think we see a very strong business ahead of us.

Jacob Johnson -- Stephens Inc. -- Analyst

Got it.

Gerri A. Henwood -- President and Chief Executive Officer

In addition, we continue to look at opportunities for inorganic growth that could make sense if there is a company that would allow us to be able to do a deal that's accretive and ask [Phonetic] for the capabilities and service offerings that we have.

Jacob Johnson -- Stephens Inc. -- Analyst

That's helpful. And then just the one follow-up. It sounds like you have added some sales people and will continue to add more may be going forward. What are the key priorities for these new hires? Is it entering some of these new verticals that you mentioned earlier, Gerri? Or is it adding new customers or sort of all of the above?

Gerri A. Henwood -- President and Chief Executive Officer

Yes. Pretty much all of the above. I mean, during 2019 we added new customers, looks like we will be able to add more at a higher rate in addition to the healthy sign of repeat business and extensions from the customers that we put on board during 2019. So, I think those are very healthy. We are looking specifically for more work for the high potency suites. We know that's an area of need. And so, among the areas where there has been hiring, we have sought candidates who have relationships with some of the companies that we know to have those types of compounds and whether [Phonetic] they likely need that help.

In addition, looking at certain other segments of service provision, such as clinical trials, associated materials, packaging and logistics that could also be very additive to margins and that are, in general, shorter term, it's not like a four-year project to get to more substantial revenues with those for any given project. This can be pretty good stand-alone on them [Phonetic].

Jacob Johnson -- Stephens Inc. -- Analyst

Great. Thanks for taking the questions.

Gerri A. Henwood -- President and Chief Executive Officer

Thanks, Jacob.

Operator

Thank you. And we are showing no further questions. I will now turn the call back over to Gerri for closing remarks.

Gerri A. Henwood -- President and Chief Executive Officer

Thank you very much. And I want to thank everyone for joining us this morning. We very much appreciate your support and look forward to speaking to you again soon. Have a good day.

Operator

[Operator Closing Remarks]

Duration: 29 minutes

Call participants:

Claudia Styslinger -- Investor Relations

Gerri A. Henwood -- President and Chief Executive Officer

Ryan D. Lake -- Chief Financial Officer

Esther Hong -- Janney Montgomery Scott LLC -- Analyst

Leland Gershell -- Oppenheimer & Co. -- Analyst

Jacob Johnson -- Stephens Inc. -- Analyst

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