Recro Pharma, Inc.

Hello, thank you for standing by and welcome to the RECRO second quarter 2021 conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Stephanie Diaz, Investor Relations, Please go ahead.

Thank you. Hello, and thank you for joining us. On today's call, we have David Enloe, President and CEO, and Ryan Lake, Chief Financial Officer. Today, we will be providing an overview of reclosed contract development and manufacturing business, including updates on corporate activities and financial results for the quarter ended June 30th, 2021. After our prepared remarks, we will welcome your questions. Before we begin, I'd like to caution that comments made during this conference call today, August 9th, 2021, will contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 concerning the current beliefs of the company, which include a number of assumptions, risks, and uncertainties. Actual results could differ from these statements, and the company undertakes no obligation to revise or update any statement made today. I encourage you to review all of the company's filings with the Securities and Exchange Commission concerning these and other matters. Our earnings press release and this call will include discussion of certain non-GAAP information. You can find our earnings press release, including relevant non-GAAP reconciliations, on our corporate website at RecroCDMO.com. With that, I will turn the call over to David Enloe, Recro's President and CEO.

Thank you, Stephanie, and thank you to everyone who has dialed in and to those who are participating today via webcast. This is a very exciting time at RECRO. Today, the company is pleased to report strong second quarter earnings as well as the addition of multiple new customers and projects to our pipeline. During the quarter, the company also significantly strengthened its financial position with the closing of an oversubscribed underwritten public offering in May that raised net proceeds of $32.1 million. These funds, combined with strategic paydowns of the company's outstanding credit facility during 2021, have substantially increased our cash balance and reduced our debt. And finally, the company continued to strengthen the business through leadership and talent with two key appointments and achieved milestones that enhance our operational capabilities and competencies. I will provide additional details on all of those achievements following an overview of our Q2 and six-month financial results. For that, I'll turn the call over to Ryan.

Thank you, David. Good afternoon, everyone. Before I begin, in addition to the brief financial overview I'll provide on the call today, additional details on our financial results for the second quarter of and six months ended June 30, 2021, are included in our press release issued prior to this call and in our Form 10-Q, which was filed today with the SEC. I'll begin with an overview of our financial results for the second quarter. Revenues for the quarter ended June 30, 2021, were $18 million. This represents a 7% increase compared to the first quarter of 2021 and a 16% increase compared to revenues of $15.5 million recorded during the prior year period. The year-over-year increase was primarily the result of increased product sales from one of our commercial partners as well as higher revenues from our clinical trial materials business, including revenue from a new commercial product tech transfer project. Importantly, our Q2 2021 revenues reflect our ongoing efforts to overcome the significant challenges that we faced in 2020, including the discontinuation of two commercial product lines by our commercial partners that partially offset our growth in the quarter. Cost of sales for the quarter ended June 30, 2021, was $12.3 million, compared to $11.6 million for the comparable period of 2020. The increase of $0.7 million was primarily due to higher commercial manufacturing volumes and was partially offset by lower costs due to certain employment incentive tax credits in 2021. SG&A expenses for the second quarter were $3.8 million compared to $4.3 million recorded in the 2020 period. The decrease of $0.5 million was primarily related to lower public company costs and stock-based compensation expense. Interest expense was $4 million for the three months ended June 30, 2021, a decrease compared to $5 million for the comparable period of 2020. The decrease of $1 million was primarily due to reduced term loan borrowings under the credit agreement with Ethereum, as reported last quarter, as well as a decrease in the LIBOR base rate of interest on our term loans under the credit agreement. For the quarter ended June 30, 2021, the company recorded net income of $1.2 million or $0.03 per diluted share as compared to a net loss of $6 million or $0.25 per diluted share for the comparable period of 2020. EBITDA as adjusted for the period was $5.4 million compared to $4.7 million in the prior year period. I will now provide an overview of our financial results for the six-month period. Revenue for the six months ended June 30th 2021 was 34.8 million compared to 37.3 million for the same period in 2020. The decrease of 2.5 million in revenue was primarily the result of the discontinuation of two commercial product lines by our commercial partners announced in the first quarter of 2020. During the 2021 period, increased product sales from two of our commercial partners, as well as higher revenues from our clinical trials materials business, partially offset the decrease. Cost of sales for the six months ended June 30, 2021, was $26.7 million, compared to $29.9 million for the same period in 2020. The cost of sales decrease of $3.2 million was primarily due to lower commercial manufacturing volumes and reflects lower costs due to prior year reduction in force, as well as certain employment incentive tax credits in 2021. SG&A expenses for the six months ended June 30, 2021, were $8.5 million compared to $9.7 million for the same period in 2020. The decrease of $1.2 million was primarily related to lower public company costs and stock-based compensations. Interest expense was $7.8 million and $10.1 million during the six months ended June 30, 2021 and 2020, respectively. The decrease of $2.3 million was primarily due to the reduced term loan borrowings under the credit agreement with Ethereum, as well as a decrease in the LIBRA base rate of interest on our term loans under the credit agreements. For the six months ended June 30th, 2021, RECA reported a net loss of $5.5 million or $0.16 per diluted share compared to a net loss of $13.7 million or $0.58 per diluted share for the comparable period in 2020. Our cash and cash equivalents as of June 30th, 2021 were $45.7 million compared to $23.8 million as of the end of the prior fiscal year. The increase in cash is primarily due to the net proceeds of $32.1 million from an underwritten public offering that closed in May of 2021. We are also maintaining our full-year revenue and EBITDA guidance. This concludes my financial overview. I will now turn the call back over to David for an update on operations and achievements during the period. Thanks, Brian.

Upon joining RECRO last December, I worked with leadership to develop and initiate a strategy designed to build the RECRO brand and business through manufacturing excellence, financial strength, and sustainable growth. Over the last six months, our team has made great strides with each of the four prongs of our strategy. As a reminder, they are expanding and diversifying RECRO's customer base, strengthening our financial position in order to better support both organic and inorganic growth, augmenting our leadership as well as restructuring our operational organization, and continuing the upgrade and expansion of our facilities and capabilities to support clinical stage projects while expanding commercial programs and high-value technology transfers and validations. During the second quarter, our team continued to build on the successes of the first quarter, and I will address our achievements in each area of our strategy point by point, beginning with the company's commitment to growing our customer base. During the second quarter, with the addition of new projects for Aztecs Pharmaceuticals, Encise Biosciences, as well as a new unnamed customer, we continued to expand and diversify our customer base, reduce our portfolio concentration risk, strengthen both our top line and margins, and make progress towards sustainable profitability. I'd like to acknowledge all of my RECRO colleagues for their successes during the past quarter. During the second quarter, we also significantly strengthened our financial position with the closing of a successful oversubscribed underwritten public offering in May that raised net proceeds of $32.1 million. In addition, through two amendments to the company's outstanding credit facility, which were executed in December 2020 and February 2021, RECRO successfully delevered a total of $25 million of debt from our balance sheet and reduced our stated rate of interest. We expect these amendments will result in cash interest savings of approximately $3.6 million in 2021 and approximately $4.2 million for full year 2022. Through these steps and achievements, we have made significant progress towards our second strategic goal of strengthening our financial position to best support both organic and inorganic growth. The third objective of our strategy is to augment our leadership as well as restructure our operational organization. As you may recall, last quarter, the company announced the addition of six new members to our business development team, including sales representatives for the clinical trial services business, or CTS, as well as regional representatives bolstering the company's reach in critical life science markets in northern and southern California, Boston, and the Midwest. With these additions, RECRO's business development team is now comprised of 11 experienced professionals led by longtime global sales and marketing executive Bill Hirschman. During and subsequent to the second quarter, RECRO made additional key appointments that we believe will significantly contribute to the company's future success and culture. In June, RECRO announced the appointment of Laura L. Parks, PhD, to its board of directors. Laura is an experienced business leader with a track record of developing high-performance, market-focused teams at a number of leading global biopharma, CDMO, and food industry companies. She recently served on the executive leadership team at Pathion, a global biopharma CDMO, until its acquisition by Thermo Fisher Scientific in 2017. In this role, she led strategic, commercial, and operational initiatives, including development and execution of an end-to-end pharmaceutical services offering, as well as a global strategic enterprise accounts organization. Prior to Pathion, Laura served as president of DSM Pharmaceuticals and vice president of Soleil, a division of DuPont. In July, Recro announced the appointment of Erica Rather as the company's inaugural vice president of people, culture, and ESG. which stands for environmental, social, and governance. This new position will be critical given RECRO's commitment to achieving sustainable growth and profitability, and doing so with a mindset towards advancing our diversity, equity, and inclusion efforts, as well as running our operations in a sustainable, responsible manner. To that end, Erica has 20 years of human resource leadership experience within the biotech and medical device industries, focusing on creating and executing innovative strategies that drive employee engagement, advance ESG objectives, and achieve operational goals. Erica most recently worked with me in her role as the U.S. Vice President of Human Resources and was a member of the global leadership team at Ajinomoto Biopharma Services, the global CDMO arm of Ajinomoto Company, which employs approximately 1,800 individuals and operates in Europe, India, Japan, and the U.S. In this role, she was a key member of the company's global and U.S. senior leadership teams with responsibility for advancing people strategies and solutions aligned with the short and long-term goals of the business. Her wide-ranging focus included culture and change management, talent acquisition and planning, employment branding, performance management, and related employee relation activities. With the additions of Laura Parks, Erica Rather, our new business development team, and new members of our technical and operations teams, we believe we have made great strides towards our third goal of enhancing leadership and restructuring our organization. And we expect each of these appointments to make significant contributions to the organization in the future. Finally today, I would like to address the fourth area of strategic focus for RECROE. which is continuing to upgrade and expand our facilities and capabilities to support clinical stage projects, while expanding commercial programs and high-value technology transfers and validations. To this end, in June, RECRO announced that it had expanded the clinical capabilities of the company's growing clinical trial services, CTS, offerings. Included among the newly added CTS capabilities are clinical scale sachet and blister packaging, for clinical trial pharmaceuticals. We are very happy to incorporate these services as they provide a new offering with which to support our existing clients and attract new clients. Further, the shorter sales and earnings cycles of these services allow for a more rapid and efficient contribution to revenue. In addition to these new CTS capabilities, during the quarter, RECRO successfully established a relationship with a European Union Qualified Person, or QP, for its CTS offerings following a successful review process. A QP declaration is required for any biotechnology or pharmaceutical company seeking to conduct a clinical trial in Europe using a drug product manufactured in a non-EU country. Based on the results of the QP's audit, the QP organization has agreed that it can represent RECRO's clients for release of materials in the EU allowing Recro for the first time to support the Europe-based clinical trial efforts of its customers. In closing, I believe the last six months, and Q2 in particular, have been validating for the company. We continue to execute our newly implemented strategy and have seen early and impressive results. Our team continues to grow, bringing superb CDMO and sales experience, as well as other talent critical to building an exceptional organization. Today, we have a stronger, more diverse customer base, and we continue to make progress towards achieving sustainable profitability and growth. Our financial status has improved significantly since the end of fiscal 2020 with the completion of a successful financing and the restructuring and reduction of the company's outstanding credit facility. And finally, we continue to make progress in enhancing the company's capabilities and competencies, which will be critical to our efforts to drive continued growth of our business both through organic and inorganic activities. As I hope I have conveyed today, I'm thrilled with the accomplishments of the RECRO team. I look forward to reporting on many more achievements in coming quarters. I'm proud of the improvements we've made in RECRO's performance during 2021 and continue to believe that given our market cap, there is a significant opportunity for value creation and appreciation ahead. This concludes my prepared remarks for today. We can now open up the call for questions. Operator?

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by to compile the Q&A roster. Our first question comes from Matt Hewitt with Craig Talon Capital. You may proceed with your question.

Good afternoon, and congratulations on all the progress.

Thanks, Matt.

A couple of questions. First, regarding the guidance, you're reaffirming the prior guidance. I'm curious if you could give us a little help on the cadence. Last year, obviously, there was a step down in Q4. Are you anticipating something similar this year, or how should we be thinking about Q3 and Q4?

Matt, great question, and thanks for asking. Good to talk to you this afternoon. We feel really good about the guidance that we've provided and, you know, maintaining our full-year guidance. I think if you look at, you know, the guidance that we put out and where we're at in terms of just the first half year results, you can pretty easily see how we can get to the full-year guidance. So we feel really good about, you know, the momentum that we have and, you know, our ability to achieve what we set out to accomplish.

Okay, so, and I'm not depressed on this, but you went from $3 million to $5.5 million in adjusted EBITDA Q1 versus Q2 to kind of stay within the range. It would imply that it's either going to fall back for the second half or just help me understand the puts and takes there, I guess, for the second half of the year.

I mean, I think that, you know, again, we feel really good. I think that, you know, certainly we are not going to see the volatility that we saw during 2020. So I would expect from a consistency point of view that Q3 and Q4 will be relatively stable.

Okay. That's really helpful. Thank you. And then shifting gears a little bit, regarding the new European clinical trial services, Obviously, you're just getting that news back here in the past quarter. What does that pipeline look like? How quickly can that start to ramp?

Yeah, this is David. I mean, what I would say is that this allows us to expand the number of conversations we can have with bioforma companies who are wanting to expand their clinical indications into Europe, or even begin clinical studies on both sides of the Atlantic. So I can't really say to you, oh, well, it's going to result in this many million more dollars of relationship. But what I can say is it certainly broadens the way that we can be of support and bring solution to our clients' clinical needs. And I think it's important also to think about that as we advanced discussions and enhanced relationships with clients who have a deeper pipeline, it may very well be the case that we're supporting them already in the U.S., and they've got a different product that they are going to launch, you know, clinical studies for in Europe, and it allows us to leverage the relationship we might have already built and therefore be able to provide material for use in Europe. So we're very happy. I have to tell you also, The QP designation and relationship is not a throwaway. It is a complicated process. It is a very serious commitment by the people who are performing the QP services, and it's not something to take lightly. It took a lot of work, and I'm really pleased with the results there.

That's great. And then maybe one more, and I'll hop back into queue. We've noticed an uptick in your partners, distribution partners for Verapamil the last couple weeks, and that would seem to coincide with the Morgantown facility being shut down. Where do things kind of sit in that market? What can you tell us, and what are your expectations there?

Yeah.

Ryan, do you want to color that for us? Yeah, I think that from our perspective, there's certainly, again, a lot less volatility than we experienced during 2020 when the company that you mentioned was out of the marketplace. From what we can see from third-party data, You know, our partners are continuing to be stable and maintain, you know, their market share and have for quite a while now.

Got it. All right. Thank you.

Thank you. And as a reminder, to ask a question, you'll need to press star 1 on your telephone. Our next question comes from Jacob Johnson with Stevens. You may proceed with your questions.

Hey, thanks. Good afternoon, and congrats on a nice quarter. Maybe just one other question following up on Matt's last question. It sounds like the verapamil market's stabilized. Just on the ADHD market, can you just talk about recent trends there? Are you seeing any green shoots as kids maybe go back to school or just any commentary on the ADHD market?

Thanks, Jacob. I'll defer to Ryan, who tracks this very, very closely. So, Ryan?

Thanks, Jacob. Good afternoon. So, you know, I would say, again, from, you know, many specialty category prescription volume trends have improved compared to this time last year, understanding that this time last year we were in, you know, a pretty heavy part of COVID. But overall, you know, levels are still below the baseline pre-COVID levels. The pediatric volumes, you know, continue to lag. They're down still in the, you know, 20% range. And from an ADHD perspective, you know, there is – some seasonality, you know, within the summer months. And, again, this is from an end user perspective, but just kids being out of school for the summer, there typically is, you know, less usage during the summer months as well.

That's helpful. Thanks for that, Ryan. And then maybe, David, just another question on the clinical trial offering. Can you just talk about where that offering stands today? You kind of talked about the EU capabilities you added, but I think you maybe added some others. And then maybe remind us the longer-term opportunity of this clinical trial.

Right. So, I mean, I think a lot of the value proposition to our clients from RECRO is the fact that we're leveraging 30, 35 years of robust in-market commercial manufacturing, and we're now sort of reverse integrating ourselves back in to being able to provide early stage preclinical and then phase one, phase two, phase three programs. And so we have essentially built out – I guess I'll call it a miniaturized version from a scale perspective of the commercial capabilities that we have so that a client can come to us in the early stages. We can manufacture the phase one and phase two materials. We also do prototype development so that a client can evaluate the way that they wish for the drug to be delivered. Then we can produce it. And then we can scale it up and ultimately be able to produce in robust commercial scale. So I would think about it that way as well as then we've added these clinical trial services capabilities which are more around multiple different ways to package, label, and distribute earlier stage program materials for clinical trial support. So I hope that's helpful.

Super helpful. Thanks for that, David. Maybe just one last question.

You know what? I failed to answer one thing. The other suite that we've built out from an early stage perspective, my apologies, is that we've actually built out a high-potency suite whereby we're able to support clinical trial material manufacturing that is using more toxic materials, and so it's built in a way that protects our operators from those materials, and there's

uh growing demand in the in uh certain areas of biopharma development for more high potent material uh clinical trials so we've got that under our belt as well got it i'll take all the color i can get thanks for the david uh just one one last question just on the the new business development team i know it can take a couple of quarters and some time for these people to bear fruit but just maybe an update on on how those efforts are going sure so

I mean, I think one thing that's really important that can get lost in the numbers is that because of COVID, we built a business development team that was not able to even see the facility ever until this past quarter. And so we were able to, in an appropriate and careful way, have the entire team come to our facilities in Gainesville, I attended that meeting. One of our board members attended that meeting. And we went through a very deep presentation and sort of created a heightened level of awareness and understanding and just relationship building between the technical staff and the business development staff. And I think that that really helped the team start to really gel, understand each other's expertise, relative to different facets of the business offerings we have and really take off from there. The team's also together right now at the CPHI Congress in Philadelphia. And so I like what I'm seeing. I like the interactions that we're having. I like the size of our funnel that's expanding and the number of opportunities we're getting and pleased with the progress. But to your first point, and it's something that we mentioned a quarter ago, you don't just add the team and immediately start seeing the results. They do have to leverage the relationships, take projects and programs through the sales cycle, and then to the other side where we're performing the operations and recognizing the revenue. But I do like what we've done and the rate at which we're doing it.

Great. Thanks for taking the questions.

Thank you. And I'm not showing any further questions at this time. I would not like to turn the call back over to David Enloe for any further remarks.

Yeah, thank you to everyone participating on today's call and webcast. In particular, I'd like to thank our customers and investors who continue to support our business. And most importantly, I again wish to extend a special thanks to our incredible employees who make Recro the exceptional company that we are. Thank you again for participating today and for your continued support of Recro.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.