Societal CDMO Inc (SCTL) 2020 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Recro Fourth Quarter and Year-End 2020 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 year ended December 31, 2020. 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, February 26, 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 involves a number of assertions, 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.

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. I'm very pleased to join you all for my first earnings call as Recro's President and CEO. Before I begin, I'd like to apologize for rescheduling our earnings call. We had initially planned to issue earnings yesterday, Thursday, February 25, however, our webcast hosting company requested that we reschedule due to a lack of bandwidth on our preferred day, hence, the move to Friday. However, as everyone knows, it's undesirable to issue any news on a Friday post market. So when given the opportunity to move the call to Friday premarket, we decided to do just that. We're sorry for any inconvenience this may have caused, and we don't expect this to happen again.

And now I'll turn to Recro. As was reported, I joined the company in December, bringing more than 25 years of experience leading biotech, drug development and GMP-manufacturing organizations. Most relevant, I have experienced leading, building and growing multiple CDMOs. Given this background and lens, the Recro opportunity was immediately attractive to me. Upon first evaluating Recro, I was struck by the facilities, capabilities and the company's exceptional team and manufacturing and compliance track record. Most compelling was the opportunity for significant growth. And after my first 2 months at Recro, I'm pleased to report that my optimism for the future of this organization has grown. I'm very happy to be at the helm of this promising company, and I look forward to reporting our progress in the months ahead.

Turning now to the prior year. 2020 was a challenging time for Recro. Variability in customer ordering patterns, a critical change in a competitor's production output and the COVID-19 pandemic, all impacted our top line revenues as well as margins. Since arriving at Recro, my priority has been to carefully evaluate our organization's vulnerabilities, develop a strategy to achieve sustainable growth for the company and to build a leadership team capable of executing. We have made great strides with each of these efforts in the recent months, and I will provide additional details on these achievements following an overview of our year-end financial results.

For that, I'll turn the call over to Ryan.

Thank you, David. Good morning, everyone. Before I begin, in addition to the brief financial overview I'll provide on the call today, additional details on our fourth quarter and year-end 2020 financial results are included in our press release issued prior to this call and in our Form 10-K, which was filed today with the SEC. I'll now provide an overview of our financial results from continuing operations for the full year 2020.

Revenues for the year ended December 31, 2020, were $66.5 million, a $32.7 million decrease compared to revenues of $99.2 million recorded during the prior year. This decrease was primarily due to the loss of Verapamil SR market share by our commercial partner in the first quarter of 2020 due to the reentry of a competitor whose production had been taken off-line in 2019 and shifts in customer ordering patterns during fiscal 2019. It is important to understand that because of this competitor's facility going offline in 2019, our Verapamil SR revenue had increased dramatically. Now that this competitor is back online, we have seen our commercial partner sustain its pre-2019 market position for Verapamil SR capsules since the end of the first quarter of 2020.

Additionally, the COVID-19 pandemic has resulted in decreased end-user demand, inventory rebalancing by our commercial partners and slower-than-expected clinical trial materials new business starts. In addition, revenue declined due to the discontinuation of 2 commercial product lines by our commercial partners. Higher revenues from our new business growth activities has partially offset the decrease, including a significant new commercial product tech transfer project.

Cost of sales for the year ended December 31, 2020, was $54.1 million compared to $51 million for the comparable period of 2019. The increase of $3.1 million was not proportionate to the decrease in revenue, primarily due to lower commercial manufacturing volumes and the related impact on fixed costs, expense through cost of sales despite making reductions in the workforce and implementing cost savings measures. Cost savings generated from these activities are expected to continue into 2021. Further contributing to cost of sales was increased costs on higher clinical trial materials new business revenues.

Total SG&A expenses for the full year 2020 were $18.1 million, a decrease compared to $19.9 million reported in 2019. The decrease of $1.8 million was primarily related to lower public company costs, which were partially offset by our new business development efforts and the addition of the company's clinical trial support services to our early GMP-centered offerings in the second quarter of 2020. Interest expense was $19.2 million for the year ended December 31, 2020. Consistent with $19 million for the comparable period of 2019, the increase of $0.2 million was primarily due to an additional term loan borrowing under the credit agreement with Athyrium in the first quarter of 2019, offset by a decrease in the LIBOR base rate of interest on our term loans under the credit agreement.

For the year ended December 31, 2020, the company recorded a net loss, including noncash charges of $26.7 million, of $27.5 million or $1.16 per diluted share. As compared to net income from continuing operations, including noncash charges of $18.5 million, of $4.6 million or $0.20 per diluted share for the comparable period 2019. The noncash charges of $26.7 million in 2020 were associated with stock-based compensation, depreciation, noncash interest expense, amortization and noncash changes in our contract asset. The noncash charges of $18.5 million in 2019 were associated with stock-based compensation, depreciation, noncash interest expense, amortization, change in warrant valuations and noncash changes in our contract assets.

Our cash and cash equivalents, as of December 31, 2020, were $23.8 million compared to $19.1 million as of the end of the prior fiscal year.

Finally, I'd like to highlight an important subsequent event that has reduced the company's outstanding debt and strengthened its overall financial position. Earlier this week, we announced the signing of an amendment to our existing credit facility with Athyrium Capital Management. Through the earlier amendment, which was announced in Q4 2020, Recro repaid $9 million of principal without penalty and favorably adjusted the agreement's leverage ratios and liquidity parameters. Under the terms of the latest amendment, the credit facility's outstanding debt balance has been further reduced from $116 million to $100 million, and the interest rate governing the facility has been decreased by 1.5%. Furthermore, there will be no additional principal amortization during the remainder of the term of the facility, which runs through March of 2023.

In exchange for the reduction of the interest and a portion of the debt, Athyrium received $9 million in equity in Recro, which we believe demonstrates their support for our organization and the opportunity for growth. Our efforts over the past 4 months have resulted in Recro successfully delevering a total of $25 million of debt from our balance sheet and reducing our interest expense and allowing us to generate greater operating cash flow to contribute to continued strengthening of our balance sheet and executing on our growth plans.

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.

Thank you, Ryan. As I stated in my initial comments, I believe there is a significant opportunity for growth at Recro. During my first few months at Recro, I have been focused on evaluating the company's assets, customers, processes and team in order to best position the organization for sustainable growth and leadership in the CDMO sector. The strategy that we have begun to execute has 4 key components: expanding and diversifying Recro's customer base; strengthening our balance sheet 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.

I will first discuss our efforts to expand and diversify our customer base. In 2020, Recro's revenues were negatively impacted by a slowing of sales for several commercial products. Indeed, independent pharma market tracking reports have shown COVID-related sales decreases across most therapeutic categories. To mitigate this type of variability and vulnerability, it is imperative that Recro increased the number of customers we have as well as the types of customers we service. To that end, in the second quarter of 2020, Recro added clinical trial support services to its early GMP-centered offerings to augment our existing customer portfolio. This business is nascent, but we've been successful in the past few months, building our visibility in this segment and onboarding multiple clinical-stage customers. While this new business represents a high-value revenue channel for Recro, our core commercial business remains strong, and we continue to pursue opportunities to further support our existing customers.

To continue this trajectory, we have been augmenting our business development team to ensure we are best positioned to identify the types of programs where Recro can partner to create the best value for our customers and ourselves. Another important element of customer growth and diversification requires that we continue to win new customers with commercial-stage projects. Historically, this has been Recro's sweet spot, and we were recently awarded a commercial project for a branded product by a Japanese pharmaceutical company. To continue this momentum, we have increased our commitment to our business development efforts in this area.

And finally, it is critical that we maximize the revenue opportunity from each relationship. Existing customers represent one of the most valuable growth channels in the CDMO business. As a customer initiates development of a new molecule, advances programs through clinical development and/or expands commercial sales, it is our goal to best position Recro to be the CDMO of choice at every stage. At present, nearly half of our existing customers have expanded or are in the process of expanding their programs beyond the initial scope of work.

The second component of our strategy is to strengthen our balance sheet in order to be better positioned for both organic and inorganic growth. As Ryan mentioned a few moments ago, we were very pleased to announce earlier this week that we significantly and favorably restructured the debt instrument with our finance partner Athyrium. This restructuring was an important step in strengthening Recro's financial status, an important factor in attracting new customers.

The third prong of our strategy is to augment our organization, both in terms of meaningful CDMO experience as well as a structure for success. Since I arrived a few weeks ago, we have brought CDMO-specific strength to our leadership team as well as our technical staff. This includes the appointments of Jim Miller, a highly regarded CDMO thought leader, to our Board; and Ryan Lake as our dedicated CFO. We also reorganized our operational leadership structure to streamline our efforts, optimize efficiencies, improve our project management competencies and ensure the strong management and quality practices we have in our commercial business are equally deployed across the growing clinical trial materials and related services business.

Finally, the fourth prong of our growth strategy focuses on the enhancement of our facilities and capabilities. Hand-in-hand with our plan to service an expanding customer base, we are committed to putting the systems and processes in place to support a broad development and manufacturing portfolio. Over the past couple of years, 2 new manufacturing suites have been constructed and commissioned to support the technical transfer and planned validation activities for several new customers' projects. We are pleased to report that the analytical transfers for these programs have been successfully completed and validation batches will begin in March.

While 2020 was a challenging year, Recro has a new leadership, a new strategy for growth and a renewed focus as we now operate from top to bottom, with the sole purpose of being a reliable, trusted CDMO partner to our customers. We are executing a calculated and comprehensive strategy that we believe will strengthen every part of our business. We believe we will increase top line revenue by servicing a larger customer base. We hope to lessen period-to-period revenue fluctuations by expanding our service offerings and diversifying our customer base. We have enhanced our facilities to better accommodate earlier-stage, highly potent and high-value projects. We have increased our commitment to marketing and business development to build our visibility and reputation within the sector. And to bring this all together, we have strengthened our leadership and improved our organizational structure to facilitate optimal operations, efficiencies and communications.

Looking to 2021, we believe these efforts have already had a positive impact as we expect revenues for Q1 2021 to trend upward, increasing by approximately 65% to 70% over Q4 2020. And for the full year 2021, we expect to outpace the overall small molecule CDMO industry growth rate. We look forward to updating you again in the near future.

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

(Operator Instructions) Our first question comes from Matthew with Craig-Hallum.

I think moving the call to the morning was a much better plan. First off, how much -- or is it possible to parse out the Q4 results? How much of that impact was -- are we balancing by customers versus another spike in the pandemic at the time versus the competitor in verapamil coming back on? Is there a way to kind of delineate what the impact was for those 3 pieces?

Yes. Thanks for the question, Matt. This is David. The first part, I'm going to defer to Ryan to answer the detail on that, but I do want to make sure that we think about the impact of timing of new business creation, where anything that we've seen happening in Q4 from a revenue perspective is, by and large, impacted by decisions made by customers far earlier in the year, right? So April, May, June, July, which was the very beginning of the COVID shutdown, if you will, that's when a lot of programs were put on hold. And just due to the uncertainty, there were a lot of decisions deferred. And so those decisions being deferred resulted in delayed responses in contracts and, therefore, lower revenue in the new business. I'll ask Ryan to color in your more specific question about the difference in the different areas and the impacts.

Yes. Thanks, Matt, for the question. So as you are aware, we had a notable benefit in 2019 from one of our customer competitors being the verapamil products that they were out of the market due to manufacturing issues. And with that competitor reentering the verapamil sustained release market in 2020, this had caused notable volatility in our quarterly revenue due to the continued rebalancing of inventory by that customer of really inventory that they had ordered in 2019. So we experienced that throughout 2020. This volatility certainly was further exacerbated by COVID. And we believe in 2021, our quarterly revenue volatility should be much less than we experienced in 2020, and we expect to see sequential quarter-over-quarter revenue growth from Q4 2020 to Q1 2021, as David had mentioned, in the 65% to 70% range. And we are tracking in our expectations right now that our full year revenue growth would be in line with kind of industry norms for the small molecule CDMOs.

I'd also say, as we've commented in the past, is that as it relates to the fourth quarter, we've typically observed patterns where in the fourth quarter, our customers have tried to lighten up their inventory levels at the end of the year and then replenish those stocks after year-end. So based on the visibility that we have and our customer forecast right now, into the first half of 2021, we are seeing that stabilization of anticipated manufacturing volumes in our projections for 2021. It is -- I've commented on prior calls, I think in terms of the magnitude, the large factor as it relates to our overall revenue decline certainly was related to our verapamil products and the impact that it had from over 2019 due to that competitor being out of the market. I would say about 2/3 of our revenue decline was associated with the verapamil products. And of that, kind of 2/3, I'd say, about 2/3 of that was associated with the competitor and then probably in the 10% to 20% range as it relates to COVID impact. Hopefully, that answers your question, Matt.

No, that's very helpful. And then in the prepared remarks and in the press release, you mentioned that the validation batches for the tech-transferred product will be started here in March. Is that -- is that the last step in the process? I would -- I think those are what in 30-, 60-, 90-day batches. So by Q3, you could potentially be generating revenues or growing the revenues from that new product?

I think right now, we're targeting 2022 for commercial revenues from that product.

Okay. All right. And then maybe one last one and I'll hop back in the queue. But with the vaccines being doled out and general reopening, schools coming back online, students going back to class, all those types of things, what are you seeing from a script volume perspective? What are you hearing from customers? Are they coming back to the table after the pause last year? And what is -- how does that kind of factor into your expectations for the upcoming year?

Thanks. I'll -- This is David again. I'll answer that from my perspective. And that is, a year ago, almost a year ago, when things really came to a grinding halt, especially on new programs, clinical studies, areas like that, all of that came to a halt because of the inability for clinical trials to be safely conducted. You had hospitals where immunocompromised patients were going in for clinical studies, and they were sharing hallways and entries and everything else with the COVID crisis. And that's all been reinvented, I would say. And so the capital that's been raised to fund so many programs over the past 2 and 3 years, as you know, record capital is being deployed, that has -- that have been parked for a while. And these programs, we now see, big picture-wise, we see a lot of those clinical studies starting to open back up in those programs going forward. So certainly, we expect the sales funnel on new business opportunities for noncommercial programs to increase. And I'll -- Ryan has some information on the scripts volume side, so I'll ask him to color in that side.

Yes. Thanks, David. So we were just reviewing a third-party industry report that was provided. And there's a $1 billion, or $1 billion gap, in diagnosis visits compared to the prior year. So it's down 30%. And overall, the prescription volumes are still down in the mid- to high single-digit range. And as we commented before, specific to the drugs that we manufacture, in particular, in the cardiology space, overall scripts in the cardiology space are down 18% year-over-year and pediatrics are down 34%. So generally speaking, I'd say that the products that we manufacture are not being impacted as severely as the specialty category declines. So that's a positive for us. And certainly, as COVID hopefully continues to abate, we will be able to see the benefit from that.

(Operator Instructions) Our next question comes from Jacob Johnson with Stephens.

Maybe one question on 2021. I appreciate the guidance outpaced the small molecule industry. But can you walk through the puts and takes for 2021? Maybe remind us of any headwinds you're facing, which I think maybe includes some of those discontinued drugs and then maybe hit on the key growth opportunities in your portfolio in 2021?

Yes. So thanks, Jacob, for the question. I would say from our core commercial business, we are expecting to see some stability as it relates to the impact that we saw in 2020. Don't forget and recall that we did have 2 product discontinuations. We expect that to create a $5 million to $7 million headwind certainly for us, but we are expecting to see growth in our new business development, clinical trial materials business that will help to offset those decreases. So that is the primary drivers. And then obviously, as the market stabilizes for our customers, we would expect that to be impacted as well and some of the profit share and results that we have.

Got it. That's helpful. And then maybe, David, a follow-up on that. I think the clinical trial material offerings was a key growth initiative for the company under Gerri. I'd just be curious about your thoughts on that business line.

Yes, it remains a priority and an area of growth for us. We think it's important to be able to extend our product portfolio to not just a late-stage commercial products or late-product life cycle commercial products, but also to strengthen our pipeline by having a portfolio of earlier-stage programs we support. We're seeing a growth in that activity, have added a lot of new customers and have an ever-increasing level of conversations that we're having with new possibilities there as well. And importantly, we reoriented our business development team to where we've brought in individuals in specific geographies with that experience where they've been focused historically on those types of projects and programs. And I think that, that's going to begin to bear fruit as well.

Got it. That's helpful. And then maybe last question, and maybe it's too soon on this, but I'll ask it anyways. David, your 4-pronged strategy includes inorganic growth in it. And can you talk about what capabilities you might be interested in adding one day to redraw this portfolio?

A little early. But certainly, I'll say this. We -- Recro is extremely good at what we do in the space that we operate in, in terms of complicated formulation challenges and the ability to deliver robust amounts of commercial product on time in full. And so anything we look for inorganically, that standard has to be maintained. And so certainly, as we step ourselves forward, we will be looking to opportunities that are adjacent immediately or at least 2 steps adjacent so that we can keep that base of knowledge. Remember, we've got 3 decades of manufacturing expertise, regulatory and quality competence on the foundation of this basically newly reoriented, entirely externally focused from top to bottom, customer-facing CDMO. And so I don't want our inorganic activities to distract from what we really provide in an excellent way on a consistent basis. So those are my parameters, and we remain active and open and looking for those sorts of opportunities.

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. As I hope is evident, I'm very happy to be part of the Recro team. Most importantly, I'm excited with this significant opportunity that lies ahead. Though I've been here only a short time, the plans we've put in motion are already beginning to pay off. Before signing off, I'd like to thank our investors for their continued support. Most importantly, I'd like to thank the entire Recro team of employees, who truly are Recro's most valuable asset. Because of the entire team's commitment to our customer success and to providing high-quality products on time and in full, I have every reason to be optimistic about Recro's future. 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.