MALVERN, PA — Recro Pharma, Inc. (Nasdaq: REPH), a leading contract development and manufacturing organization (CDMO), with integrated solutions for the development, formulation, regulatory support, manufacturing and packaging of oral solid dose drug products, reported financial results for the three months ended March 31, 2020.
“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, a number of whom are on the front lines of this crisis helping patients,” said Gerri Henwood, President and Chief Executive Officer of Recro. “In 2020, we experienced multiple challenges that impacted our revenues, including increased competition from one of our key customer’s competitors, as well as indirect and direct effects of COVID-19. We are revising our 2020 guidance to now be in the range of $80-85 million. We remain focused on executing on our strategic priorities while prudently managing the business through this rapidly evolving economic situation.”
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 the Company is committed to continue providing essential pharmaceutical products to customers, they are also taking all necessary measures to protect the health and safety of their employees. The Company has assembled an internal COVID-19 task force to address the continually updated guidance from local, national and international sources to ensure operations are responding appropriately to the crisis.
- Recro’s Employees – Recro promptly instituted protocols to have appropriate personnel work remotely. For those employees continuing to support essential operations at their work locations, the Company has implemented strict social distancing and other protective measures in order to ensure the health of employees while continuing to provide critical products. They have also restricted business travel and have closed their campus 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.
- Product Supply and Customer Support – Recro’s production, shipping and customer service functions remain operational to allow us to maintain a continuous supply of products to customers. They are communicating regularly with suppliers so that their supply chain remains up to date. Recro’s customer service team is operating remotely and remain available to assist customers and distribution partners as needed.
COVID-19 Potential Impact
The COVID-19 pandemic has had unforeseen adverse effects on both the world economy and the general commercial activity. As a result, the Company’s business and results of operations have been adversely affected. Given the uncertain scope and duration of the pandemic, the extent to which the pandemic will continue to impact their financial results remains uncertain. However, the Company will continue to monitor the situation closely and is actively evaluating various ways to reduce costs and conserve operational resources.
As of March 31, 2020, Recro had cash and cash equivalents of $19.9 million.
Revenues and cost of sales (excluding amortization of intangible assets) were $21.8 million and $18.3 million, respectively, for the three months ended March 31, 2020, compared to $25.1 million and $14.4 million for the three months ended March 31, 2019. The decrease of $3.3 million in revenue was primarily due to decreased product sales and royalties recognized from two of their commercial partners driven by the re-entry of a competitor to the market that resulted in reduced sales by one of their commercial partners and slowed purchases to both customers due to their prior year inventory remaining on hand. Cost of sales increased $3.9 million primarily due to commercial product mix and manufacturing variances resulting from lower production volumes (including $0.8 million related to a reduction in force associated with revised commercial volume) changes in inventory and expansion of their formulation and development capabilities. Annual savings from this reduction in force are estimated to be $2.0 million in fiscal year 2021.
Selling, general and administrative expenses for the three months ended March 31, 2020 were $5.4 million, compared to $6.5 million for the same period in 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.
Amortization of intangibles was $0.6 million for each of the three months ended March 31, 2020 and 2019, respectively, which was related to the amortization of their CDMO royalties and contract manufacturing relationships intangible asset over its estimated useful life.
Interest expense, net, was $5.1 million for the three months ended March 31, 2020, compared to $3.6 million for the three months ended March 31, 2019. The increase of $1.5 million was primarily due to the higher principal balance on their Athyrium senior secured term loan and amortization of the related financing costs.
For the three months ended March 31, 2020, Recro reported a net loss of $7.7 million, or $0.33 net loss per diluted share, compared to a net loss of $2.2 million, or $0.10 net loss per diluted share, for the comparable period in 2019. The 2019 results include discontinued operations related to the Acute Care business and are excluded from the company’s continuing operations for all periods presented.
For 2020, the Company is revising its guidance as a result of recent developments, including:
- Increased competition from one of their key customer’s competitors for certain product strengths that had previously been out of the market was trending at an approximate 30% of market share level, but recently has recovered to a greater sustained percentage of approximately 50% market share. This has impacted both anticipated future manufacturing volumes and profit sharing;
- Slower than expected new business growth, which they believe is primarily attributable COVID-19. COVID-19 has required different ways of meeting and contacting customers, and has slowed customer access, and caused a reassessment of plans for development services by some customers and prospects for a variety of reasons, such as concerns about availability of development funding, timing of clinical trials, etc.; and
- Notifications by two of their customers of discontinuations for two commercial product lines, that resulted in a decrease of approximately $4 million on previous 2020 revenue guidance and is estimated to have an annual impact to 2021 revenue of approximately $7 million to $8 million.
As a result of these recent events, operating improvement initiatives that have been executed as a result of lower anticipated manufacturing volumes for 2020, including a 10% reduction in force during the first quarter, is estimated to provide an annual savings of approximately $2 million in fiscal year 2021. Additional cost saving measures are planned and continue to be assessed.
The Company believes these unexpected events are a 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. The Company now expects its 2020 revenue to be in the range of $80-$85 million, taking into consideration existing market forces, contracts, timing of customer order patterns, customer inventory rebalancing, competition, potential impacts of COVID-19, as well as their experience with customer’s product market estimations and timing related to growing and diversifying the Company’s 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. The Company expects its Operating Income to be in the range of $5 million to $9 million and Operating income, as adjusted* to be in the range of $13 million to $17 million. EBITDA, as adjusted (Historical CDMO) to be in the range of $33 million to $37 million and EBITDA, as adjusted (Standalone)* to be in the range of $26 million to $30 million. The Company remains committed to capturing and delivering its upside long-term potential.
*Operating Income, as adjusted, EBITDA, as adjusted (Historical – CDMO), and EBITDA, as adjusted (Standalone) are non-GAAP financial measures (See reconciliation of non-GAAP financial measures in this release).
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