MALVERN, PA — Recro (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 and six months ended June 30, 2020.
“As the global COVID-19 situation continues to evolve, we have implemented new ways of working, and our concerns remain the health and safety of our associates, our customers, and the patients treated with the products we manufacture as well as our shareholders,” said Gerri Henwood, President and Chief Executive Officer of Recro.
“During the second quarter, the effects of the pandemic continued to have an adverse impact on our revenues. Despite this, our operations remain stable, and we successfully launched our new Clinical Trial Materials (CTM) business.
“We have also secured multiple new customers. As we navigate through these challenging times, we remain steadfast in our commitment to delivering important development stage and commercial medicines.”
“Looking ahead over the next few quarters, we expect the pandemic to continue to have some impact on our customers and the therapeutics categories they serve.
“Based on third party sales data for our customers and consistent with a recent third party pharmaceutical market tracking report, which showed significant overall and segment impacts to total prescriptions (TRx) across most therapeutic categories, we expect some continued volatility in our customers sales and inventory levels as they adjust to uncertainties surrounding the pandemic including the potential for fewer patient visits to doctor’s offices, access to telehealth, and a resultant reduction in new and refill prescription rates.
“Other impacts could come from possible stay at home orders and patient attitudes towards the necessity of medications and treatment of chronic diseases. Given the continuing uncertainty of the potential impact of the pandemic on our business and operations, we believe it is prudent to withdraw and suspend our 2020 financial guidance.”
Second Quarter 2020 and Recent Highlights
- CDMO Readiness for Essential Drugs and Medical Supplies. In support of a recently signed technology transfer project for a non-US firm for a marketed product, as well as for potential future commercial manufacturing growth, Recro has installed a 400-liter high shear granulator and a 420-liter fluid bed dryer.
- Clinical Trial Materials. Growth in the CTM area and associated Logistics can now be addressed with on-demand services for innovative trial design and direct-to-patient logistics. The Company’s Development services offerings include non-clinical formulation, Active Pharmaceutical Ingredient (API) characterization, over-encapsulation & manufacturing in addition to double blind, randomized clinical packaging and commercial packaging services.
- New Business for High Potency Oral Products. Recro entered into an exclusive development agreement with an undisclosed top 20 pharmaceutical company to develop a high potency oral NCE. Recro is also in negotiations with regard to a development agreement to produce another high potency marketed product for another top pharmaceutical company.
- Ongoing COVID-19 Response and Impacts. The COVID-19 pandemic continues to have adverse effects on the U.S. and world economies, including the commercial activities of Recro’s customers and their peers. As a result, Recro’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 Recro’s financial results remains uncertain in terms of manufacturing volumes and profit sharing revenues which have seen negative impacts in the second quarter of 2020 without loss of market share, the Company believes due to reduced total prescription (TRx) rates for many chronic therapeutics. Recro expects the COVID-19 pandemic and the other factors that have impacted revenue in the first six months of 2020 to continue to have some impact its revenue in the third and fourth quarters of 2020. However, the Company will continue to monitor the situation closely, has taken steps to reduce costs and drive more new business and is actively evaluating ways to further conserve operational resources.
Financial Results for the Three Months Ended June 30, 2020
As of June 30, 2020, Recro 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 in revenue was primarily due to decreased product sales and royalties recognized from three of Recro’s commercial partners. The Company also experienced slower than expected new project starts and overall growth due to the impacts of COVID-19.
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. Cost of sales decreased $2.5 million and was not proportionate to the decrease in revenues, primarily due fixed costs being spread over lower commercial volumes.
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 completion of readiness for the CTM business.
Amortization expense was $0.6 million for both three-month periods ended June 30, 2020 and 2019, which was related to the amortization of the CDMO royalties and contract manufacturing relationships intangible asset over its estimated useful life.
Interest expense was $5.0 million and $5.2 million during the three months ended June 30, 2020 and 2019, respectively. The decrease of $0.2 million was due to a slight decrease in the LIBOR base rate of interest on loans with Athyrium.
For the three months ended June 30, 2020, Recro reported a net loss of $6.0 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.
Financial Results for the Six Months Ended June 30, 2020
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 $19.0 million in revenue was primarily due to the same factors as described in the three-month results above in addition to the discontinuation of a commercial product line in the first quarter.
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, primarily due to fixed cost being spread over lower commercial volumes. Reduction in force actions that were taken in the first half will drive annual estimated savings of $3.4 million in fiscal year 2021.
Selling, general and administrative expenses for the six months ended June 30, 2020 were $9.7 million, compared to $12.0 million for the same period in 2019. The decrease of $2.3 million was primarily due to the same factors as described in the three-month results above.
Amortization expense was $1.3 million for both six-month periods ended June 30, 2020 and 2019, which was related to the amortization of the CDMO royalties and contract manufacturing relationships intangible asset over its estimated useful life.
Interest expense was $10.1 million and $8.8 million during the six months ended June 30, 2020 and 2019, respectively. The increase of $1.4 million was due to additional borrowings under its Credit Agreement with Athyrium in the first quarter of 2019, partially offset by a decrease in the LIBOR base rate of interest on those term loans in 2020.
For the six months ended June 30, 2020, Recro 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.
The Company is withdrawing and suspending financial guidance primarily due to the difficulty of forecasting the impact of COVID-19 and its impact on market forces, contracts, timing of customer order patterns, customer inventory rebalancing and timing of development projects.
The Company believes that they cannot reliably predict rapidly changing and uncertain factors impacting the macro market for their commercial customers and the timing of clinical trials and related CDMO services in the current COVID-19 environment.
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