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Recro Pharma (NASDAQ:REPH)
Q2 2020 Earnings Call
Aug 10, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning, and welcome to the Recro second-quarter 2020 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 second-quarter 2020 financial results. This is Claudia Styslinger, and I'm 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 and six months ended June 30, 2020.

The press release is available on the Investors page of our website at www.recrocdmo.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 requirements and manufacturing plans, customer decisions to move forward with our manufacturing services, average profitability or mix of the products we manufacture, or customers facing increasing or new competition.

This 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 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, August 10, 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.

Actual results may differ materially. We may also discuss certain non-GAAP financial measures with respect to our financial performance for the second quarter of 2020. Specifically, we may discuss the operating income or loss as adjusted or the earnings before interest, taxes, depreciation, and amortization or EBITDA as adjusted, historical CDMO, which excludes public company cost, or EBITDA as adjusted stand-alone, which public company costs. We believe these non-GAAP financial measures are helpful in understanding our business as they give investors greater transparency into the supplemental information used by management in evaluating the financial performance of our 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 all continue to navigate through the ongoing global COVID-19 pandemic. As the COVID-19 situation continues to evolve, we have implemented new ways of working, and our primary concern remains the health and safety of our associates, our customers and the patients treated with the products we manufacture, as well as our shareholders. I'd like to take a moment to discuss some of the challenges from the quarter.

COVID-19 pandemic continues to have certain adverse effects on both the U.S. and world economies, including the commercial activities of our customers and peers. Looking ahead over the next few quarters, we expect the pandemic to continue to have some impact on our customers and the therapeutic categories they serve. We expect some continued volatility in our customer sales and inventory levels as they adjust to uncertainties surrounding the pandemic, including the potential for fewer patient visits to doctors' offices, access to telehealth and a resultant reduction in new and refill prescription rates.

Given the continuing uncertainty of the impact of the pandemic on our business and operations, we believe it is prudent to withdraw and suspend our 2020 financial guidance, as Ryan will confirm later. I refer you to the two slides of the recently issued third-party market data, which surveys the impact seen across many therapeutic areas, including 15% decline in refill rates for cardiovascular medications and a 41% decline in pediatric medications, to name a few. These slides are attached as an exhibit to the Recro second-quarter earnings release 8-K filed this morning and can also be found on the Investors section of our website under Presentations. As a result, Recro's business and results of operations have been adversely affected in ways that were not anticipated when the first quarter was reported.

The consequences to commercial work were seen in terms of manufacturing volumes and certain profit-sharing results, even while maintaining market share, such as for Teva's verapamil ER business. We believe this is due to reduced total prescription rates for many chronic therapeutics, including verapamil. Certain development customers continue to revisit their product development priorities or the timing of services due to the impacts of COVID-19 on their potential financings, timing of trials, changes in staffing, etc. As a result, we have seen delayed new business project starts.

We believe in the intrinsic merits of the commercial products we manufacture for our customers as solid therapeutics, and that there will be stabilization and eventual return to more regular habits of prescription filling and patient compliance with these products as we adjust to life with the pandemic backdrop. We believe that the new business initiatives we have undertaken, including a new tech transfer project with a major non-U.S. firm for a marketed product, as well as the addition of CTM services, will continue to build over 2020 and beyond. However, we will continue to monitor the situation closely and are actively looking for ways to reduce costs and conserve operational resources.

During the second quarter, the pandemic continued to have an adverse effect on revenues. We generated $15.5 million for the quarter. Despite COVID-19, our operations remained stable, and we successfully launched our new CTM business and secured multiple new customers. For the newly launched CTM business, we are proactively responding to what we saw as an opportunity in the large and growing logistics business that is being driven by the need for on-demand services from small, medium, and large pharmaceutical companies.

This includes the ability to fulfill product clinical trial material orders for cutting-edge clinical trial designs. For most clinical trials being conducted in the backdrop of the COVID-19 pandemic, sponsors are trying to keep patients safe in their homes and out of clinics and hospitals where they could be more vulnerable to capturing the virus. So CTM service offerings are also attractive to customers because of direct-to-patient logistics. In response to these key emerging customer needs and utilizing our regulatory, analytics, and logistics expertise, our new CTM business includes a fully integrated service offering from nonclinical formulation; API characterization of manufacturing; clinical trial material manufacturing, including over-encapsulation and double-blind packaging.

We also provide stability testing, as well as packaging services and direct-to-patient shipping. Should the trials ultimately be successful, we are also able to offer commercial packaging services. Another business segment I'd like to highlight is our high-potency oral products business. We recently entered into an exclusive development agreement with an undisclosed top 20 pharma company to produce a high-potency oral product.

We anticipate that this high-potency business segment will grow over the next 12 to 18 months and beyond. On the general CDMO front, to support the recent commitment of a non-U.S. company to a tech transfer for a marketed product, we recently installed a 400-liter high shear granulator and a 420-liter fluid bed dryer. This equipment will also expand the type of tech transfer products we can work with.

We recognize that in this challenging and unprecedented time, U.S. 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 frontlines of this crisis helping patients. We believe our business has a solid foundation and that we have seen progress in our new business efforts and have taken this opportunity to improve overall efficiency and implement certain upgrades.

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

Ryan 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 for the second-quarter financials. As of June 30, 2020, we had cash and cash equivalents of $22.8 million.

Revenue for the three months ended June 30, 2020, was $15.5 million, compared to $31.3 million for the same period in 2019. The decrease of $15.7 million was primarily due to decreased product sales and royalties recognized from three of our commercial customers. The first key customer experienced lower market share compared to 2019 due to the reentry of a competitor that we previously communicated to the marketplace but has maintained its market share since the first quarter of 2020. The second key customer saw decreased sales that reduced our royalties and manufacturing volumes as a result of overall market forces.

The third key customer decreased sales due to the impact of a combination of the overall market forces and the discontinuation of a commercial product line that we previously communicated in the first quarter of 2020. We also experienced slower-than-expected new business project starts and overall growth due to the impacts of COVID-19. We expect that the return of a competitor to the market, experienced by one of our commercial partners, overall COVID-19 market force impacts to all of our customers, discontinuation of product lines by two of our customers that was previously communicated in the first quarter, slower-than-expected new project starts, and potential delays, and customer programs may continue to impact our revenue in the third and fourth quarters of 2020. We are continuing to monitor these impacts, and the events and the COVID-19 impact on our business and revenues.

Cost of sales for the three months ended June 30, 2020, was $11.6 million, compared to $14.1 million for the same period in 2019. The cost of sales decreased $2.5 million and was not proportionate to the decrease in revenues primarily due to fixed costs being spread over lower commercial volumes and slower-than-anticipated new project starts. Cost of sales also included $0.2 million related to the second reduction in force associated with continued revised commercial volume and development revenue. Selling, general, and administrative expenses for the three months ended June 30, 2020, were $4.3 million, compared to $5.5 million for the same period in 2019.

The decrease of $1.3 million was primarily related to lower public company costs and lower travel and marketing costs, driven by the COVID-19 pandemic, which were partially offset by higher selling costs due to increased headcount and associated personnel costs focused on business development, as well as the completion of the readiness for the CTM business. For the three months ended June 30, 2020, we reported a net loss of $6 million or $0.25 per diluted share, compared to a net loss of $2.8 million or $0.12 per diluted share for the comparable period in 2019, which included losses from discontinued operations. Moving on now to the six-month financials. Revenue for the six months ended June 30, 2020, was $37.3 million, compared to $56.3 million for the same period in 2019.

The decrease of $19 million in revenue was primarily due to the same factors that I mentioned earlier. Cost of sales for the six months ended June 30, 2020, was $29.9 million, compared to $28.5 million for the same period in 2019. Cost of sales increased $1.4 million and was not proportionate to the decrease in revenues, again, primarily due to fixed costs being spread over lower commercial volumes. Two separate reductions in force were also undertaken in the first half of 2020 and are expected to drive annual estimated savings of $3.4 million in fiscal-year '21.

Selling, general, and administrative expenses for the six months ended June 30, 2020, were $9.7 million, compared to $12 million for the same period in 2019. The decrease of $2.3 million was primarily due to the same factors that I mentioned previously. For the six months ended June 30, 2020, we reported a net loss of $13.7 million or $0.58 per diluted share, compared to a net loss of $4.8 million or $0.21 per diluted share for the comparable period in 2019, which included losses from discontinued operations. Regarding forecast, as Gerri commented earlier, we've decided to withdraw and suspend our financial guidance for 2020 primarily due to the difficulty of forecasting the impacts of COVID-19 on the balance of 2020 and its impacts on market forces, contracts, timing of customer order patterns, customer inventory rebalancing and the timing of development projects, as well as our belief that we cannot reliably predict factors relating to the macro market for our commercial customers and the timing of clinical trials and related CDMO services in the current COVID-19 environment.

I'd now like to turn the call back to Gerri for her closing comments. Gerri?

Gerri Henwood -- President and Chief Executive Officer

Thank you, Ryan. In closing, I would just like to say that we remain steadfastly committed to all of our stakeholders. We are focused on executing our strategic priorities and are committed to delivering on Recro's upside potential while prudently managing the business through this rapidly evolving economic situation. I'd now like to open the call for questions.

Operator?

Questions & Answers:


Operator

[Operator instructions] Your first question comes from the line of Leland Gershell with Oppenheimer.

Leland Gershell -- Oppenheimer & Co. Inc. -- Analyst

Good morning. Thank you for taking my questions. A couple of questions. So first of all, with regard to the different factors that affected the numbers in the quarter, I know you aren't breaking those out in detail, but if you could give us some kind of granularity as to perhaps what the larger levers were, Mylan versus the decreased prescriptions from COVID? If you could share some color there.

And also, I want to ask with regard to the new CTM agreements which you've been signing. At the same time you, have those clinical trials have been slowing down or on pause given the pandemic. So I wanted to ask how you foresee realization of revenues from those agreements. Thanks.

Gerri Henwood -- President and Chief Executive Officer

Sure. So I'll deal with part of the first question and toss it to Ryan and come back for the CTM question, Leland. So with respect to verapamil extended-release, which is one of our more important products, we did see an impact on profit sharing. But there was not any notable change in market share.

Market share appears to be consistently sticking at about the 50% level for Mylan and for Teva ER in that sector. But let me pass to Ryan for an overview of what were the bigger factors.

Ryan Lake -- Chief Financial Officer

So as we look year over year, I would say, from both recent third-party audit data that we have for the entire verapamil market, both capsules and tablet forms are being impacted probably in the 10% to 12% range during the second quarter. And we really believe this is consistent with the overall impacts to the marketplace and the other therapeutic areas as a result of COVID-19, supported by the third-party market report that we put out and published this morning in the 8-K, and that's also on our website. The largest contributor year over year to the overall decrease in revenue was verapamil, which made up about two-thirds of the decline. One thing that you have to recall and remember, it is a tough comparison year over year as our base business in 2019 saw notable upside due to Mylan being out of the marketplace for both the verapamil SR and PM products and only supplying the market on a limited basis.

And that really, last year, resulted in an increase in purchases from both Teva and Lannett in the prior year as they were filling Mylan shortfall. And that obviously resulted in higher manufacturing and profit-sharing revenues for us. We also saw that, and if you'll recall what we communicated in the prior year, was that the capsule volumes for one of our customers in the first half of 2019, because of that, exceeded all of their 2018 capsule volumes. So to some extent, it's a very hard comp, but the majority of the decrease is related to that.

And then as we think about sequentially, I'd say, the biggest change in revenue that we saw was primarily attributed to the ADHD products. And again, that's supported by not only the third-party audit data that we receive but also in line with the market data trending report that we saw -- that has been having an impact.

Gerri Henwood -- President and Chief Executive Officer

Students at home were not apparently taking their ADHD products in the way they would have taken it in a classroom setting.

Ryan Lake -- Chief Financial Officer

Yeah. I mean, I think the third-party data for the ADHD market, including both methylphenidate and dexmethylphenidate, both the capsules and tablets decreased over 20-plus percent from Q2 versus Q1. And we saw similar, maybe a little bit higher decreases among the products that we sell to Novartis.

Gerri Henwood -- President and Chief Executive Officer

And that was consistent with that sector, and not just with the Novartis products but with other products, too. On the CTM side, Leland, let me give you a second. Do you have any follow-up to Ryan or...

Leland Gershell -- Oppenheimer & Co. Inc. -- Analyst

No, no, no. Let's go ahead, Gerri. Thank you.

Gerri Henwood -- President and Chief Executive Officer

OK. So on the CTM side, recognizing that trials may not be going forward at the pace that they would have in the absence of the pandemic, and there was a very notable slowdown in the second quarter of this year for new trial starts, we are seeing a number of folks that we deal with customers and other prospects that are saying to themselves they want to be ready to begin as soon as they reasonably can. So they are proceeding with some projects that are, for instance, like over-encapsulation of a comparator drug or of a placebo. They are looking at just-in-time packaging, meaning you may have done a run for a double-blind trial, but you're only going to set up either by site or by patient as you're ready for them.

So more like just-in-time logistics, which was not common in past days but has become more so because of the pandemic and patients not wanting to be at centers, and sponsors not wanting to risk their contamination. So that's an area that we're seeing some demand. And also just some opportunities for packaging on the commercial side as well that can fall under that umbrella. There are some that have developed in the recent months.

And all this is because we started preselling these services before we had finished all of the last dot the Is and cross the Ts. We have done that now. We had done some clinical trials, logistics, and materials prior to this effort, but we've expanded the scope and the size, and in particular, the warehouse that will be necessary to keep that.

Leland Gershell -- Oppenheimer & Co. Inc. -- Analyst

Understood. And then one follow-up, if I may. You had swung to cash flow positive briefly. And now in the absence of guidance and other workforce reductions will benefit you next year, we have the uncertainty of the pandemic.

Any perspective you can share on the company's cash flow outlook as we kind of get through the rest of this year and next year? Thanks.

Gerri Henwood -- President and Chief Executive Officer

Yes.

Ryan Lake -- Chief Financial Officer

Yeah. So thanks, Leland. From a cash and cash-equivalents perspective, again, we ended the quarter with about $23 million. The cash should remain relatively consistent for the remainder of the year, plus or minus a couple million.

I think from a covenant perspective, as far as our debt, we haven't broken any covenants as of Q2. Based on the minimum cash liquidity covenant, we don't currently expect any problems with making the required amortizing principal payments that began in early '21. And based on what we currently believe and what you can see with our trailing 12-month EBITDA leverage, it's going to be close. We don't have perfect certainty.

We do have a good relationship with our lender, and we're continuing to have ongoing dialogue and provide them with business updates, including the impacts that we're seeing from COVID on the business and how we're responding to those challenges.

Leland Gershell -- Oppenheimer & Co. Inc. -- Analyst

All right. Thank you very much for taking my questions. Thanks, everyone. Appreciate it.

Operator

Your next question comes from the line of Jacob Johnson with Stephens.

Jacob Johnson -- Stephens Inc. -- Analyst

Hey, thanks for taking the questions. Can you size up the potential revenues from these new high potency business wins? How much could those offset some of the headwinds you're facing here in the near term?

Gerri Henwood -- President and Chief Executive Officer

I mean, it's a reasonable question. And we don't typically release individual project sizes. But let's say, they're not going to make or break, but it's always hard to get people who want to be first in new service offerings. We have that now on a project that I think is of a household name company, and we think that's going to make it easy.

There are a number of proposals out there in the hypo side, and we think it will get easier to get folks across the finish line now that somebody else has been doing it. Those projects can get quite big on the development side right now with the opportunities we're looking at. So they will tend to be in the neighborhood of under $1 million to start with. But again, as with the other development side, as you grow and come back for the next phase, they're doubling and so on.

Same is true for the stability and the analytical associated with those. Those can be a little bit more expensive because of the precautions that need to be taken in dealing with those molecules. On the CTM side, that's a business that we have seen grow very rapidly for some other very large companies. We don't have the same footprint that some of those very large companies do.

But it is an area that a number of our existing customers and prospects have been asking about. We brought in Bill Hirschman, who has a terrific track record of selling services in the development, clinical and then CTM space over a 30-year career and had a big impact on growing that business for a top-three logistics company, in the area of hundreds of millions of dollars of increase over a period of time. We recognize this does not happen in 10 minutes. I wish it did.

But we do think it's an area that typically is shorter-term from getting a project to turning it into cash. And also another way in the door with customers who may not have worked with us before, it gives them an opportunity to work with us in a way that lets them begin to see some of the related services, analytical and stability for the stability of supplies put up, the ability of the team to do over-encapsulation work that could be part of that that might bring in more clinical trials work or conceivably even commercial work for which we also have capacity. And I think those two, along with getting the first of what we hope, will be more tech transfer opportunities where we can provide complex dosage form with some expertise that we have and reassure a non-U.S.-based customer that we can successfully tech transfer that product. Even though those tech transfers can take some time to get into full swing, they're definitely worth having, and hopefully, they want to come part of the installed base on the commercial side.

Jacob Johnson -- Stephens Inc. -- Analyst

Got it. Thanks for all that color, Gerri. And just one other follow-up question. I think last quarter, Gerri, you talked about the search for a permanent CEO.

Can you just give us an update on that effort?

Gerri Henwood -- President and Chief Executive Officer

Sure. The board has retained a top three national search firm and has been for several months now -- or more than several months, looking at candidates and going through a process. And I know that the board is interested in getting someone into that seat with the right kind of experience and ready to go, and we will certainly do anything we can to be supportive of that. And I remain, in the meantime and after that committed to the company, as I will be staying on the board even after that.

Jacob Johnson -- Stephens Inc. -- Analyst

Great. Thanks for taking the questions.

Gerri Henwood -- President and Chief Executive Officer

Thanks, Jacob.

Operator

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

Gerri Henwood -- President and Chief Executive Officer

Thank you, operator, and thank you all for joining us here this morning. Have a good day. And we will journey on and continue to push forward and growing our business. Thanks for your support.

Bye.

Operator

[Operator signoff]

Duration: 33 minutes

Call participants:

Claudia Styslinger -- Investor Relations

Gerri Henwood -- President and Chief Executive Officer

Ryan Lake -- Chief Financial Officer

Leland Gershell -- Oppenheimer & Co. Inc. -- Analyst

Jacob Johnson -- Stephens Inc. -- Analyst

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