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Recro Pharma Inc (NASDAQ:REPH)
Q1 2020 Earnings Call
May 11, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Recro Gainesville First Quarter 2020 Financial Results Conference Call. At this time, all participants' lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speakers today, Ms. Claudia Styslinger with Investor Relations. Please go ahead Ma'am.

Claudia Styslinger -- Investor Relations

Good morning, and thank you for joining us on today's conference call to discuss Recro's first quarter 2020 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 three months ended March 31st, 2020. 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 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 and manufacturing plans, customers decisions to move forward with our manufacturing services, average profitability or mix of the products in 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 and the Management's Discussion and Analysis of Financial Condition and Results of Operations section 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, May 11, 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 first quarter of 2020. Specifically, we may discuss operating income or loss as adjusted or the earnings before interest, taxes, depreciation and amortization or EBITDA as adjusted which excludes public company costs or EBITDA as adjusted stand-alone, which public company costs. We believe these non-GAAP financial measures are helpful in understanding our CDMO business as they give investors greater transparency into the supplemental information used by management in 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 these non-GAAP financial measures to GAAP measures in the earnings press release.

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

Gerri Henwood -- President and Chief Executive Officer

Thank you, Claudia, and good morning, everyone. We hope those joining us today are keeping safe and healthy as we continue to navigate through the ongoing global COVID-19 pandemic. In this challenging and unprecedented time, US pharmaceutical product manufacturing has never been more essential and we continue to provide important medicines to our customers, nearly all of whom are on the frontline of this crisis helping patients.

We have undertaken several initiatives that are designed to help navigate the company through this trying time. Under Pennsylvania and Georgia State and local shelter-in-place orders as a pharmaceutical manufacturer, Recro falls within the category of healthcare operations which are essential businesses that need to continue during the COVID-19 outbreak. While we remain committed to providing essential pharmaceutical products to our customers, we're also taking necessary measures to protect the health and safety of our employees. To that end, we've instituted protocols requiring appropriate personnel to work remotely. For those employees continuing to support essential operations at our work locations, we have implemented strict social distancing and other protective measures in order to ensure the health of our employees while continuing to provide critical products.

[Indecipherable] business travel and have closed our CDMO campuses and other facilities to outside visitors and implemented practices that continue GMP compliance while allowing remote staff and auditors to observe key areas and documents by video. In addition, we've also assembled an internal COVID-19 task force to address the continually updated guidance from local, national and international sources to ensure our operations are responding appropriately to the crisis.

On the products supply front, our production, shipping and customer service functions remain operational to allow us to maintain a continuous supply of products to our customers. We are communicating regularly with our suppliers to keep our supply chain up to date and our customer service team is operating remotely and remains available to assist our customers and distribution partners as needed.

The COVID-19 pandemic has had unforeseen adverse effects on both the world economy and commercial activity in general. As a result, our business and results of operations have been adversely affected. With respect to our specific financial performance, our first quarter 2020 revenue was $21.8 million. There is an uncertain scope and duration of the pandemic and so the extent to which the pandemic will continue to impact our financial results remains uncertain. Nevertheless, we believe our business has a solid foundation and that we have seen progress in our new business efforts and improved overall effectiveness. However, there are direct and indirect effects of the COVID-19 pandemic on the business and prospects for 2020 in certain areas are affected, which I will describe in a moment.

In addition, one of our products sold by a Recro partner had a competing product reenter the market and it took back more share than predicted. As a result of the shift in market share for the product we make for our partner, as well as the direct and indirect effects we believe are caused by the COVID-19 impacts, we believe it is prudent to revise our 2020 revenue guidance to now be in the range of $80 million to $85 million. We are expanding our service offerings in this quarter to include more activities associated with clinical trials materials such as over-encapsulation of drugs and double-blind packaging of therapeutic regimens for trials, stability testing of clinical supplies, direct-to-patient shipping of trial supplies, etc.

We have been fortunate to recruit a very senior Head of Business Development for these service offerings with a great track record of growing new business in the service area, Bill Hirschman [Phonetic]. We believe that Bill, along with the solid team and infrastructure at the RGD facility and the senior leadership team at both sites will catalyze growth in these service offerings. These services added to the development efforts of the existing business development team and the commercial tech term future [Indecipherable], gives us COVID-19 impact in the immediate future has seen two of our customers rationalizing some smaller, but still economically meaningful to us line items/products inspired we believe by the financial environment brought with the COVID-19 pandemic.

Similarly, some development customers have needed to revisit their plans for product development priorities with the timing of services due to impacts COVID-19 on their potential financings, timing of trials, changes in staffing, etc. We've made revisions to staffing in early Q1 and as the COVID-19 impact has been felt, we continue to assess opportunities, to reduce costs without reducing important capabilities as we move forward. We are encouraged by the progress that our business development group made in Q1 and believe we've made prudent [Technical Issues], but the situation is evolving and full visibility visibility.

And finally, as we noted on our investor conference call associated with the separation of Recro and Baudax Bio, the Recro Board intends to recruit a full-time CEO to take over operations of Recro. The Board continues to be engaged in this process and is evaluating candidates.

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

Ryan D. Lake -- Chief Financial Officer

Thanks Gerri. 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 March 31st, 2020, we had cash and cash equivalents of approximately $19.9 million. Because the Acute Care business is presented as a discontinued operations as of December 31st, 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 first quarter of 2020 were $21.8 [Phonetic] million compared to $25.1 million for the first quarter of 2019. The decrease of $3.3 million was primarily due to decreased product sales and royalties recognized from two of our commercial partners driven by the reentry of a competitor to the market that resulted in reduced sales by one of our commercial partners and slowed purchases to both customers due to their prior-year inventory remaining on hand.

For the first quarter of 2020, operating loss from continuing operation was negative $2.6 million. Operating loss as adjusted was negative $0.5 million, EBITDA as adjusted historical from the CDMO was $4.9 million and EBITDA as adjusted stand-alone was $2.7 million. Cost of sales for the first quarter of 2020 was $18.3 million compared to $14.4 million for the first quarter of 2019. The increase of $3.9 million was primarily due to commercial product mix and manufacturing variances resulting from lower production volumes, including approximately $0.8 million related to a reduction in force associated with the revised commercial volumes. Change in inventory and expansion of our formulation and development capabilities, annual savings from this reduction in force are estimated to be $2 million in fiscal year 2021.

Selling, general and administrative expenses for the first quarter of 2020 were $5.4 million compared to $6.5 million for the first quarter of 2019. The decrease of $1.1 million was primarily related to lower public company costs, which were partially offset by higher business development costs related to an increase in new development contract sales. Net interest expense for the first quarter of 2020 was $5.1 million compared to $3.6 million for the same prior year period. The increase of $1.5 million was primarily due to the higher principal balance on the Athyrium senior secured term loan and amortization of the related financing costs.

For the first quarter of 2020, Recro reported a net loss of $7.7 million or $0.33 net loss per diluted share compared to a net loss of $2 million or $0.10 net loss per diluted share for the first quarter of 2019. The 2019 results include discontinued operations related to the Acute Care businesses and are excluded from the company's continuing operations for all periods presented.

We believe these unexpected events are result of increased competition coupled with the direct and indirect impacts that COVID-19 is having on existing and new customers resulting in lowered expectations for 2020. We now expect our 2020 revenue to be in a range of $80 million to $85 million, which takes into consideration existing market forces, contracts, timing of customer order patterns, customer inventory rebalancing, competition, potential impacts of COVID-19, as well as our experience with customers' product market estimations and timing related to growing and diversifying our new business development services revenue along with the impact of customer access and operating improvement decisions and timings and the company's current beliefs and estimations with respect to new business generation.

We expect our 2020 operating income to be in the range of $5 million to $9 million and the operating income as adjusted to be in the range of $13 million to $17 million. EBITDA as adjusted for the historical CDMO is expected to be in the range of $33 million to $37 million and EBITDA as adjusted stand-alone to be in the range of $26 million to $30 million.

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

Gerri Henwood -- President and Chief Executive Officer

Thank you, Ryan. In closing, I would like to reiterate that we remain steadfastly committed to our employees and their families, our customers, our suppliers, shareholders and business partners. We are focused on executing on the strategic priorities and are committed to delivering on Recro's upside and 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?

Questions and Answers:

Operator

Thank you. [Operator Instructions] And our first question comes from Leland Gershell with Oppenheimer. Your line is open.

Leland Gershell -- Oppenheimer & Co. -- Analyst

Good morning Gerri. Thanks for taking my questions.

Gerri Henwood -- President and Chief Executive Officer

Hey, Leland.

Leland Gershell -- Oppenheimer & Co. -- Analyst

I want to understand the unexpected competition that occurred in Q1. Could you kind of give us a sense of how that way versus COVID-19 and as the year goes through the rest of 2020, how we should think about your expectations for that competitive element and COVID-19 in terms of what quarter-to-quarter cadence might be as we get through the year? And then I have a follow-up or two. Thanks.

Gerri Henwood -- President and Chief Executive Officer

Sure. So first let me talk generally about the magnitude of impact of that incremental. So we had guided previously that we believe that Mylan was back in the market and we didn't have perfect data on that at the time we put the guidance out. We've had some end of the year data in the last couple of months of the fourth quarter and we had January in hand at the time that we were providing the guidance. We saw higher level of Mylan participation in that market segment than had been predicted by our partner or then which we expected. That impact probably accounts for somewhere in the neighborhood of 25% to 30% of our expectations vis-a-vis the currently projected guidance. The balance of that impact was really coming we believe from the COVID-19 direct and indirect effects.

The indirect effects being those smaller product lines that two different customers decided to deal with at this time and those are just very recent notifications that we received and will have an impact on us this year and would have some additional impact on a full-year basis next year. We also believe that there is an impact on timing and on final decision-making on the part of development customers who have been will put them in the sort of ready to buy or about to commit or committed where they are concerned about the environment right now and are I believe a heavily timing impacted event.

The business development people and the operational people have been working very hard and in a very detailed way to respond to those customers to do whatever we can to help support them through this time. But I think just a number of companies are not willing to initiate things because they're concerned about how this environment will evolve. And so it was these smaller product lines combined with the business development timing and other impacts that I think where the majority of the effects that caused us to have to change our guidance.

Leland Gershell -- Oppenheimer & Co. -- Analyst

Okay. And as we think through you know Q2, Q3, Q4 of this year, can you provide us with any sense of how you see the largest hit occurring, would it be in Q2 as it has been for many other companies for the resumption to more normalcy through the year end of the year? Should we think about the workforce reduction being kind of reversed with an increase in staff? Maybe give us your thoughts.

Gerri Henwood -- President and Chief Executive Officer

Yeah, good question. So as you know, in the CDMO world you rely on customer orders and so those orders can fluctuate intrinsically. And so it is not perfectly easy to say well here is where we're going to see the bigger impact. We certainly think that what we've reflected in guidance reflects full-year impact. We did a reduction in force in the first quarter that there was a chart identified for in our financials. There is quite possibly other sets of reductions that can take place and we're endeavoring to implement those as quickly as possible. Some of those were made necessary to think about because of the further discontinuation of those two smaller product lines in addition to some of the delays on that business development side for the development business. Those expenses would likely to be incurred in the second quarter, although it's possible that some could have impacts in the third and fourth.

I think that if I had a perfect crystal ball and could see is there going to be calm and progress and certainty on the COVID front, I think that would certainly help our business development customers to get more secure about wanting to initiate things and that could be good for us in probably the second half of the year. But it is hard to know given that you all hear exactly what we hear, which is a variety of opinions about how much of a recurrence or recrudescence could we see as things open up. We hope that won't be the case. We're certainly trying to be prudent in our own operations in that regard and we suspect many, many other Americans are acting the same way.

So the quarter-to-quarter cadence, I can't give you explicit guidance on it, but I can say that we have tried our best to take into account the normal variations that we would have seen and then lay against that the impact of COVID on that environment, which doesn't make it perfectly easy to predict quarter-by-quarter, but we do think that the year looks plausible and within range.

Leland Gershell -- Oppenheimer & Co. -- Analyst

Okay. And then one follow-up if I may. In terms of new business, which you've been talking about for some time, I wanted to ask in the quarter to what extent was new business a contributor to the financials and would new business presumably be impacted similarly as existing as we go through the rest of the year in terms of your guidance? Thanks.

Gerri Henwood -- President and Chief Executive Officer

Thank you. So new business was a modest contributor in the first quarter and it was about on target with what we thought through, I would say through the middle part of the quarter. It did get slowed for the third month of the quarter versus what we were expecting because customers began to, as we get into March, think about, am I ready to initiate this, do I want to go ahead and sign up for this, etc. As we look at second quarter, I think that we had higher expectations for second quarter for new business. And again, that's reflected in that full-year guidance number and the reduction because we think that's an area that is vulnerable to and based on feedback we've had from a number of our customers or hoped for soon to be customers in addition to those who are already sort of under the tent, but not initiated.

We think that as those customers feel more comfortable about the business, they will want to initiate projects they will return. There is the fact that it does take time to do these projects. And to some extent, if those customers came back, there would be time for certain types of activities to happen, but not for all of the activities necessarily being undertaken for our customers. So a lot depends on when people get more comfortable and to what extent they get more comfortable, how easily we can reembark on that. But in terms of traction to the business, to the facilities, the capabilities, I think we have been positively reinforced by that. There were quite a number of new customers coming in, including some recognizable names. So all of that I think augurs well for the company in the long-term. But it is as you've seen disappointing to us that we don't have the availability of more of that work immediately, but are still optimistic that a good portion of that can be included in the calendar year.

Leland Gershell -- Oppenheimer & Co. -- Analyst

Okay. Thank you very much.

Gerri Henwood -- President and Chief Executive Officer

Thanks Leland.

Operator

Thank you. And our next question comes from Esther Hong with Janney. Your line is open.

Esther Hong -- Janney Montgomery Scott LLC -- Analyst

Hi, good morning. Thanks for taking our questions.

Gerri Henwood -- President and Chief Executive Officer

Good morning Esther. Sure.

Esther Hong -- Janney Montgomery Scott LLC -- Analyst

Hi, good morning. So regarding revised guidance, so what are the assumptions to the three revenue streams and manufacturing royalty R&D. What was the contribution mix behind the key products with the key commercial partners and any additional details behind the discontinuation for commercial product lines by the few customers? Thanks.

Gerri Henwood -- President and Chief Executive Officer

So I'll start with the last part of the question first, and that is the two discontinuations. I mean, quite literally as we were preparing the press release and the Q, that information came in from those parties. We don't have every detail of it. We have made assumptions based on what those clients have said to us to-date. That remains to be confirmed, but the assumptions are that there would be an impact following this quarter from those product discontinuations. Those are not by themselves as big as others that we have in the mix, but they were contributory to us and they will be missed.

In terms of the split-outs by product, we don't usually do that by product in the quarterly reports. But I would say that as you know we had and we have talked about this on the call with a K that one of our customers had left the year with a significant amount of inventory still in hand and that did impact manufacturing revenue for the first quarter because they did not need as many manufacturing batches. Royalty income reflected that change in market share that we talked about that was somewhat higher than had been expected by our partner and by us. But beyond that, I would say that the splits were relatively normal.

Esther Hong -- Janney Montgomery Scott LLC -- Analyst

Okay, great. Thank you.

Gerri Henwood -- President and Chief Executive Officer

Thanks Esther.

Operator

Thank you. And our next question comes from Jacob Johnson with Stephens. Your line is open.

Jacob Johnson -- Stephens Inc -- Analyst

Hi, thanks. I guess first question, Gerri, you mentioned recruiting a permanent CEO. Can you discuss some of the key criteria the Board is looking for in candidates and then should we think of this being an internal or external candidate?

Gerri Henwood -- President and Chief Executive Officer

So there is a limit to what I can disclose because I'm obviously not running that search and that's being run by a committee of the Board, but I think what they're looking for is someone who has had experience with CDMOs, who has had significant experience with larger operations and growth and acquisitions and they're looking for somebody who is ready to be all-in dive into the business. And that experience will have to be shown by their positive track record over the last X number of years. The Board has considered candidates both internally and externally and I wouldn't like to comment on which way it is leaning now, but I think they're hopeful that they will be coming to a conclusion in the coming months that what it's like to get someone like that of that caliber. Often they're currently in another position, so it may take some time for them to be able to transition out. We are fully prepared and fully in it with this business until such transition has happened and the other party is happy that they're ready to take over the reins.

Jacob Johnson -- Stephens Inc -- Analyst

Got it. That's helpful. And then just one question on guidance, what's assumed in the updated guidance in terms of gross margins? How should we think about them trending throughout the rest of the year?

Gerri Henwood -- President and Chief Executive Officer

Ryan?

Ryan D. Lake -- Chief Financial Officer

Yeah. I mean from a gross margin perspective, we're looking at kind of the low 30% range.

Jacob Johnson -- Stephens Inc -- Analyst

Got it. Thanks for taking the questions.

Operator

Thank you. I'm showing no further questions at this time. I'd now like to turn the call back to Gerri for closing remarks.

Gerri Henwood -- President and Chief Executive Officer

Thank you, operator. Thanks everyone for joining us today. We are disappointed to have to convey this change in guidance, but we are very positive about the business. It is on solid footing we believe and poised for growth. We believe like others that this current level of uncertainty associated with a pandemic will be resolving, will get clearer over the coming months. But we think there is a pent-up demand for services. There are people with projects that will be moving forward and believe that this is fundamentally a healthy business that will return to former form in the not too distant future. Thank you very much and have a great day.

Operator

[Operator Closing Remarks]

Duration: 31 minutes

Call participants:

Claudia Styslinger -- Investor Relations

Gerri Henwood -- President and Chief Executive Officer

Ryan D. Lake -- Chief Financial Officer

Leland Gershell -- Oppenheimer & Co. -- Analyst

Esther Hong -- Janney Montgomery Scott LLC -- Analyst

Jacob Johnson -- Stephens Inc -- Analyst

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