Societal CDMO Inc (SCTL) 2021 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Recro First Quarter 2021 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded. I would now like to hand the conference over to Stephanie Diaz of Recro's Investor Relations Group. 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 Recro's contract development and manufacturing business, including updates on corporate activities and financial results for the quarter ended March 31, 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, May 6, 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 involve 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 in 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.

In my first full quarter at Recro, our team initiated execution of a 4-pronged growth strategy that we expect to transform the company in the coming months and years. This strategy calls for the expansion and diversification of our customer base, strengthening our financial position in order to best support both organic and inorganic growth; augmenting the company's leadership and enhancing our operational organization; and finally, continuing efforts to upgrade and expand our facilities and capabilities to support growing customer demand. I'm pleased to report that during the first quarter of 2021, we made progress in each of these areas, with particular success in the expansion of our customer relationships and projects.

During the first quarter alone, we secured multiple project wins, including extensions of current customer projects, new clinical trial packaging business and a new capsuling formulation development customer. I will provide details on these achievements following an overview of our Q1 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 first quarter 2021 financial results 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 now provide an overview of our financial results for the first quarter of 2021.

Revenues for the quarter ended March 31, 2021 were $16.8 million. Though this is a $5 million decrease compared to revenues of $21.8 million recorded during the prior year period, it represents a 70% sequential increase compared to the fourth quarter of 2020. The year-over-year decrease was primarily due to the previously reported discontinuation of 2 commercial product lines by our commercial partners in early 2020 as well as higher customer ordering patterns in early 2020. Partially offsetting the decrease were higher revenues from new business growth in our Clinical Trials Material business and successful execution of our previously announced commercial tech transfer project from a Japanese pharmaceutical company.

Cost of sales for the quarter ended March 31, 2021 was $14.4 million compared to $18.4 million for the comparable period of 2020. The decrease of $4 million was primarily due to lower commercial manufacturing volumes and reflects lower costs due to the prior year reduction in force as well as certain employment incentive tax credits in 2021. Total SG&A expenses for the first quarter were $4.7 million, a decrease compared to $5.4 million recorded in the 2020 period. The decrease of $0.7 million was primarily related to lower public company costs and stock-based compensation expense.

Interest expense was $3.9 million for the 3 months ended March 31, 2021, a decrease compared to $5.1 million for the comparable period of 2020. The decrease of $1.2 million was primarily due to reduced term loan borrowings under the credit agreement with Athyrium as well as a decrease in the LIBOR base rate of interest on our term loans under the credit agreement. I'll summarize the changes to the credit agreement momentarily.

For the quarter ended March 31, 2021, the company recorded a net loss of $6.8 million or $0.03 per diluted share as compared to a net loss of $7.7 million or $0.33 per diluted share for the comparable period of 2020. EBITDA, as adjusted for the period, was $2.7 million compared to $2.8 million in the prior year period. Our cash and cash equivalents as of March 31, 2021 were $11.6 million compared to $23.8 million as of the end of the prior fiscal year.

I will now provide financial guidance for the year. For the full year 2021, the company expects revenue to be approximately $68 million to $72 million, EBITDA as adjusted to be in the range of $15 million to $17 million, and net loss to be in the range of $15.6 million to $13.6 million. This guidance takes into consideration overcoming the impact from the loss of 2 commercial programs in 2020, existing market forces, contracts, timing of customer orders, the accuracy of our customers' product market estimations and the company's current beliefs and estimations with respect to success and timing related to growing and diversifying the company's new business development services revenue. Experience shows that in new business development organization, as there is at Recro, takes multiple quarters to optimize performance. The company cautions against extrapolating quarterly results to estimate full year results.

Before I hand the call back to David, I'd like to highlight the recent success we've had strengthening the company's financial position. A key component of the company's growth strategy, as many of you know, Recro has an existing credit facility with Athyrium Capital Management. In late 2020, the company signed an amendment to this agreement under which Recro prepaid $9 million of principal without penalty and favorably adjusted the agreement's leverage ratios and liquidity parameters. During the first quarter of 2021, the company signed another amendment to this agreement, under which the credit facility's outstanding debt balance was reduced from $116 million to $100 million and the interest rate governing the facility was decreased by 1.5%. Furthermore, there will be no additional principal amortization during the remaining term of the facility, which runs through March of 2023.

In exchange for the reduction of interest and a portion of the debt, Athyrium received $9 million in equity in Recro. As a result of these amendments, Recro successfully delevered a total of $25 million of debt from our balance sheet, reduced our stated interest rate and made progress toward our goal of strengthening our overall financial position. We expect these amendments will result in cash interest savings of approximately $5 million in 2021 and approximately $6 million for the full year 2022. In addition, we have added Athyrium as an investor and partner in growth, and we are very pleased to have their support.

This concludes my financial overview. I'll now turn the call back over to David for an update on operations and achievements during the period. David?

Thanks, Ryan. As I previewed in my opening comments, my full -- first full quarter at Recro was a very active one, during which our team created and initiated execution of a comprehensive plan to grow the company. Today, I'm pleased to report that we've made progress in each of the following 4 strategic objectives: 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 our -- 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 half of 2020, Recro saw a decrease in revenue due to a decline in sales of a number of commercial pharmaceutical products. Multiple independent pharma market tracking reports have documented COVID-related sales decreases across most therapeutic categories, and Recro is not immune to this slowdown, as the company was notified by 2 customers of their decision to terminate 2 commercial products in 2020. This experience emphasizes the importance of building a broad and diverse client base that can withstand the fluctuations of market volatility. With this in mind, we have worked diligently to reduce our dependency on a limited number of programs and are pleased to report that we were awarded multiple contracts in the first quarter alone. This represents one of the most productive quarters Recro has ever had in terms of contract execution for both new and incremental business. I credit this growth as much to Recro's technical and execution reputation as to our new business development team, which I'll address in greater detail a bit later.

The contract wins during the first quarter are a combination of contracts with a new manufacturing client, a new clinical trial packaging client and expansion of projects with several existing customers. Each of these projects represents a step towards establishing sustainable profitability and diversification of our customer base. In particular, we are pleased to have clients spanning the entirety of Recro's capabilities as well as across the spectrum of product development activities. At the earliest stage of the spectrum are our formulation development offerings, which then lead into Clinical Trial Materials manufacturing business. This service was launched less than a year ago at Recro, and we're pleased with our growing visibility in this segment. We expect this business to be a high-value revenue channel for the company in the coming years, and we are already seeing promising growth in this offering.

Historically, Recro has specialized in the manufacture of complex, solid oral dose commercial-stage products. The addition of a new client to this portfolio is an important win for us as it allows us to leverage our expertise and demonstrate our strengths relative to peer companies.

Importantly, each new customer that we signed today opens the door to multiple other projects with that customer in the future. There's no better validation at this point than the multiple project expansions we signed with existing customers during the quarter. Such expansions are particularly gratifying as they inherently offer efficiencies compared to new customer projects that are being onboarded for the first time. Further, they signify the degree to which our existing customers value our service, our expertise and our deliverables, validating the company's tagline, Start with Recro, Stay with Recro.

The second step in our growth strategy is to strengthen our financial position in order to better support both organic and inorganic growth. We also made great progress on this front during the quarter. As Ryan just stated, the amendments to our outstanding credit facility will save the company millions of dollars in the years to come. In addition, our multiple customer wins during the quarter will increase our top line revenue and we expect the increase in capacity utilization will improve margins over time.

The third prong in our strategy is to augment our leadership as well as restructure our operational organization. Again, Recro made great strides in this area during the quarter. First, the company appointed Jim Miller to our Board in February. Many of you already know Jim. He's a highly regarded adviser on drug manufacturing strategy and a preeminent authority on the biopharmaceutical CDMO industry. He's the founder and former President of PharmSource, the CDMO industry's principal source of market intelligence, which was sold to Global Data, a London-based publicly traded provider of market intelligence services in 2016. Jim is an extraordinary thought leader in our sector, and we are thrilled to have his guidance and vision as we move forward.

As I mentioned previously, we have also significantly strengthened our business development team. As we recently announced, the company has added 6 new members to our BD team, including sales representatives for our Clinical Trial Services business 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. As Ryan stated in his comments, typically, when a CDMO puts a new business development team into place, one can expect a time lag of several quarters before realizing tangible results in terms of new business being signed.

Given that, we are particularly impressed with our BD team's Q1 achievements and their efforts to quickly get up to speed and effectively sell our broad range of services. We look forward to reporting many more business development successes in the future.

Last, but not least, we continue to enhance our facilities and capabilities in order to best support the needs of our growing customer base and its demand. During the first quarter, we completed validation of our new granulation suite, and we are currently running a registration batch and a feasibility batch in this new suite for 2 of our new customers as well as running a registration batch phase on a different equipment train for a third customer. We are also seeing returns on our investment in packaging and labeling capabilities as evidenced by the new contracts we have put in place for these services.

In closing, I wish to reiterate our team's commitment to achieving sustainable growth and profitability and doing so with a renewed mindset towards advancing our diversity, equity and inclusion efforts as well as running our operations in a sustainable, responsible manner. We have carefully evaluated the opportunity at hand and developed a clear and decisive strategy to achieve growth, visibility and leadership in this sector. Going forward, we expect to continue to execute against this plan, expanding and diversifying our customer base, taking steps to strengthen our financial position, optimizing our leadership and teams and enhancing our services and facilities to attract new business and best support growing demand.

This concludes my prepared remarks for today. We can now open up the call for questions. Operator?

(Operator Instructions) Our first question comes from Matt Hewitt with Craig-Hallum Capital.

Yes. This is Lucas on for Matt Hewitt here at Craig-Hallum. I guess, first off, congrats on the good quarter. And then I guess, you didn't really provide an update on the tech transfer that you've had in progress with the -- I believe it's the Japanese pharma company. I think you've been getting a small amount of revenue related to that. Should we expect that to step higher in the back half of the year?

Thanks for the question, Lucas. And what I'll think I'll do is defer over to Ryan for detail on it. I know that we're progressing on that tech transfer. But as for expectations going forward, let me defer to Ryan. Thank you.

Lucas, thanks for the question. So we are making progress on the tech transfer, doing registration batches for the customer, and we do continue to generate revenue for that customer as we do those services for them. And as we previously stated, we're currently expecting to also generate commercial revenues from that customer beginning in 2022.

Okay. That's helpful. And then I guess for your ADHD products, have you begun to see an uptick in orders there now that kids are back in school, at least in some parts of the world?

Yes. It's a great question, Lucas. What I would say is that overall, from the data that we review, we can see that the prescription volume trends improved in Q1. But overall, they're still well below baseline for pre-COVID levels. I think that some of the third-party data that we've reviewed recently suggests that there's still going to be that ongoing impact through the first half of 2021 where they're essentially predicting a gap in diagnosis visits still being down roughly 12% and projecting about a 4% decline in prescription volumes due to those lost diagnosis visits. So overall prescription volumes are still -- overall across all therapeutic categories are down in the mid-high to single-digit range. And more specific to the drugs that we manufacture, the pediatrics therapeutic area is down over 30%. So it's still down significantly. I'd say from an ADHD market perspective, although it's still down pre-COVID levels, it's not down as much as all of the other -- the general pediatric category, and it's been relatively stable over the past few quarters.

Our next question comes from Jacob Johnson with Stephens, Inc.

It's Mason on for Jacobs. Appreciate the 2021 guide. As we look at the remaining quarters of the year, how should we think about phasing or seasonality for the balance of this year? Any comments on big puts or takes that we should think about or take into account?

Go ahead, Ryan.

So thanks, Mason. Overall, for the first quarter, as you saw, we were at the high end of the range that we set out achieving 70% sequential growth compared to the same period of last year, we saw the decline, but that was, as we stated before, related to the discontinuation of some previously described product line discontinuations, which were creating some headwind for us. And I think what's important with the guidance is that we're still projecting to grow revenue in the low-to-mid single-digit range and EBITDA in the high single-digit 20% range. And that growth is really a combination of -- it's a combination of various things, including the market forces and improvement from last year where we saw more lumpiness from our customers rebalancing their inventory levels.

Got it. And maybe a more high-level question for David here. It's -- in the biologics market, spare capacity is really hard to come by. Even before COVID, it seems like demand was outpacing supply, which COVID has just made worse. Could you maybe talk about the supply-demand dynamic for small molecule manufacturing? And how much spare capacity is there out there in the market?

Yes, an important question. Thank you. One of the things, I mean, macro that we're seeing is pressure and expectation on biopharma companies to really take a deeper look at their supply chain and focus on repatriating or transitioning supply sourcing to the U.S., particularly for products being sold in the U.S. And so this is something that's really generated a lot of attention in the space. And one of the reasons we feel good about our position is that we do have the capacity. We are obviously located in the U.S. and the small molecule market remains the largest market. It's -- some would say over -- most estimates have the small molecule market greater than 50% of the total. Every year for the past several years, there have been more small molecule drugs approved than biologics. And so very quietly, the small molecule market just continues to be the majority position in the market.

And because of that, and even a recent pipeline analysis we did showed that there are even a greater percentage of new small molecules in development than biologics, believe it or not, as a percentage. And so the demand for small molecule and oral solid dose is solid. The expectation that production will migrate to or repatriate to the U.S. is a real dynamic that we're seeing. The expectation of biopharma companies that they will have second source put in place for business continuity purposes is a very important dynamic, and it's not just talk anymore. People are really focused on that and the fact that we have that capacity and that historic track record of commercial production bodes well for us and gives us confidence. And that's one of several reasons why, and I know you hear this a lot from a lot of CEOs, but I really do believe that Recro is significantly undervalued. If you look at transaction multiples and EBITDAs that we see in the industry today, you will see that the undervaluation conclusion I draw is pretty straightforward. And while we understand we're currently in a rebuilding mode since I've joined the company, we are hopeful that our valuation will become reflective of that in the coming quarters. So thanks again for your question.

Congrats on the quarter.

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

Thank you to everyone participating on today's call and webcast. Many thanks to our partners and our investors. We greatly appreciate your continued support. And a special thanks to all of our employees at Recro. Our employees are the heart of our organization, and it is their dedication to quality and excellence that drives our momentum forward. Thank you again for participating today and for your continued support of Recro.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.