Societal CDMO Inc (SCTL) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Recro Pharma Third Quarter 2018 Conference Call. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to turn the call over to Natalie Wildenradt. You may begin.

Good morning, and thank you for joining us on today's conference call to discuss Recro's third quarter 2018 financial results. This is Natalie Wildenradt, and I'm joined today by Gerri Henwood, President and Chief Executive Officer; and Ryan Lake, Chief Financial Officer. Following prepared remarks today by Gerri and Ryan, we will open the call up for questions.

Earlier this morning, we issued a press release detailing our financial and operating results for the 3 months ended September 30, 2018. The press release is available on the News & Investors page of our website at recropharma.com.

Before we begin our formal comments, I'll remind you that various remarks we make today constitute forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements related to our financial outlook; our ability to raise capital in terms acceptable to us; our ability to resolve the Complete Response Letter issued by the U.S. Food and Drug Administration on our New Drug Application for IV meloxicam and the time frame associated with such resolution; and our product development plans for our other product candidates, including the results and timing of any future preclinical studies and clinical trials for such product candidates. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our expectations and forecasts and can be identified by words such as expect, plan, will, may, anticipate, believe, estimate, upcoming, should, intend and other words of similar meaning. Any such forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties. These risks are described in the risk factors in the Management's Discussion and Analysis of Financial Condition and Results of Operations section of Recro Pharma's annual report on Form 10-K for the fiscal year ended December 31, 2017, and any quarterly reports on Form 10-Q, which are on file with the Securities and Exchange Commission and available on the SEC's website.

Any information we provide on this conference call is provided only as of the day of this call, November 7, 2018, and we undertake no obligation to update any forward-looking statements we may make on this call on account of new information, future events or otherwise. In addition, any unaudited or pro forma financial information that may be provided is preliminary and does not purport to project financial positions or operating results of the company. Actual results may differ materially.

We may also discuss certain non-GAAP financial measures with respect to our financial performance for the 9 months ended September 30, 2018, and estimates for the full year ending December 31, 2018. Specifically, we may discuss the earnings before interest, taxes, depreciation and amortization, or EBITDA, for our contract development and manufacturing organization, or CDMO, business. We believe this non-GAAP financial measures is helpful in understanding of our CDMO business as it gives investors greater transparency into the supplemental information used by management in evaluating the financial performance of our CDMO business. These non-GAAP financial measures should be considered in addition to, but not as a substitute for, reported GAAP results included in our earnings release and to be discussed on this call. We have included a reconciliation of EBITDA to GAAP measures in a supplemental financial schedule, which has been made available on the News & Investors page of our website at recropharma.com.

In addition, on this call, we will include references to IV meloxicam, an investigational product. The use of IV meloxicam has not been approved by the FDA. The safety and efficacy of the investigational use of IV meloxicam has not been determined. There is no guarantee that IV meloxicam will be approved for marketing by any regulatory agency.

I would now like to turn the call over to Gerri Henwood. Gerri?

Thanks, Natalie, and thank you all for joining us this morning. The third quarter of 2018 has been a productive and focused period for Recro. As many of you know, in October, we announced resubmission of the IV meloxicam NDA to FDA and their issuance of PDUFA goal date of March 24, 2019. I want to thank the team for their hard work in submitting the NDA so quickly. We believe IV meloxicam has the potential for approval for the management of moderate-to-severe pain.

Our recent efforts have centered on refining our commercial plan and precommercial manufacturing in advance of the potential launch of IV meloxicam in the first half of 2019. We believe IV meloxicam as a novel non-opioid candidate has the potential to play a meaningful and differentiated role in the management of moderate-to-severe pain, and our prelaunch planning is focused on ensuring physician and patient adoption upon approval. We remain confident in IV meloxicam's profile, and we look forward to providing an update in the first quarter of 2019.

Also in Q3, our Gainesville CDMO division has exceeded expectation, generating $18.3 million in revenue for the third quarter of 2018. Given the third quarter results, we have raised our 2018 full year CDMO revenue guidance to $75 million.

Before turning the call to Ryan Lake, our Chief Financial Officer, I'd like to quickly touch on the opening of the additional 24,000-square-foot GMP development and high potency products services facility, which we announced last month. The new site, which is near our existing 97,000-square-foot DEA-licensed CDMO facility, houses expanded development space focused on creating unique oral dosage forms and solving formulation, process and analytical issues as well as providing additional capacity for clinical trial supply manufacturing and related services. The expanded facility also has specialized space dedicated to development of, and GMP manufacturing for, high potency products. We believe these additional facilities and capabilities will allow us to provide a broader range of high-quality services to new clients and partners as well as to our existing customers.

I'll now turn the call over to Ryan to discuss our financial highlights. Ryan?

Thanks, Gerri. Good morning, everyone. Since we issued a press release and our Form 10-Q earlier this morning outlining our full financial results, I'll just review some of the key third quarter highlights.

As of September 30, 2018, we had cash and cash equivalents of $37 million. Our contract development and manufacturing division continued to exceed expectations, as Gerri mentioned, during the third quarter, generating revenues of $18.3 million compared to $17.1 million for the third quarter of 2017. The increase in revenue was primarily due to increased profit-sharing revenue and increase in product sales. Cost of sales were $8.5 million and $6.9 million for the 3 months ended September 30, 2018, and 2017, respectively. The increase is primarily due to the increase in product sales for the periods.

Research and development expenses for the third quarter of 2018 were $11.3 million compared to $9.3 million for the third quarter of 2017. The increase of $2 million was primarily due to an increase in precommercialization manufacturing costs for IV meloxicam, which had to be charged to research and development expense preapproval, and an increase in development costs for our other pipeline products. These increases were partially offset by a decrease in NDA costs as the 3 months ended September 30, 2017, included our NDA filing fee for IV meloxicam.

General and administrative expenses for the third quarter of 2018 were $7 million compared to $6.6 million for the third quarter of 2017. The increase of $0.4 million was primarily due to business development costs in our CDMO segment and professional costs associated with addressing the CRL. As Gerri mentioned earlier, we're excited to announce that we're increasing our 2018 CDMO guidance and believe we will generate approximately $75 million in revenue, taking into consideration existing contracts and timing of customer order patterns as well as our experience with customers' product market estimations.

We continue to be encouraged by our CDMO business development activities and, with the expansion of our facility and capacity, believe we are well positioned to continue to build our business in 2019.

I'll now turn the call back to Gerri for closing comments. Gerri?

Thank you, Ryan. We're encouraged by the strong continued performance of our CDMO division, and we remain committed to maintain this high level of execution, particularly as we integrate our newly expanded facility.

Looking forward, the next 6 months represent a potentially transformative period for Recro. We've maintained a commitment to realizing IV meloxicam's potential as a novel non-opioid product for the management of moderate-to-severe pain. With the recent submission -- resubmission of the NDA and the PDUFA date set for March 24, 2019, we believe we've taken meaningful steps towards achieving this goal. Our current focus is preparing for launch, if approved, ensuring the full potential of this candidate can be realized.

Importantly, while IV meloxicam is our lead program, the Acute Care division has additional therapeutic candidates. We continue to advance our novel anesthetic neuromuscular blocking and reversal agents. And this year, we've progressed preclinical and manufacturing activities to support the next step in Phase I studies for each of the 2 NMB agents in the first half of 2019. We believe these agents represent incremental value drivers within our Acute Care pipeline with the potential to enhance both induction of anesthesia and recovery from neuromuscular blockade. And we look forward to providing more updates on this program in the future.

We're encouraged by the collective progress across both company divisions, and I'd like to thank the entire Recro team for their efforts and commitment and our shareholders for their continued support.

I'd now like to open the call for questions. Operator?

(Operator Instructions) Our first question comes from David Amsellem of Piper Jaffray.

This is Mickey Ingerman on for David this morning. With the recent changes in the reimbursement landscape, namely the unbundling of EXPAREL in ambulatory surgical settings, what are your thoughts on the potential for additional CMS changes such as separate reimbursement in the outpatient setting? And as a follow-up to that, can you guys walk us through how you're thinking about reimbursement specifically for IV meloxicam and, specifically, your strategy for driving volume from hospital P&O committees?

Sure. So as you may know from what we had disclosed in the past, we had hired a group of key account managers to deal with IDNs and award systems. And that team was kept intact after the CRL letter and has continued to work to have formulary discussions under the aegis of the changed regulations that allow for those kinds of discussions. We believe that will help us to move forward with formulary approval. It's not going to be instant, but we think the combination of the applicability of meloxicam in the outpatient setting as well as the inpatient setting will be attractive to us in terms of getting some early start. Ambulatory surgical centers, as many of you know, are not as heavily bureaucratic as would need to be hospitals or their affiliated outpatient surgery centers. And so it's possible to get on formulary faster and get trial usage. That's important because many of the surgeons who do surgery at ambulatory surgical centers are high-volume individuals that often can't get quite enough operating time or the economics are not as favorable in a hospital setting. So having them have the opportunity to try the product, and we believe be reinforced by the use of product and its efficacy and tolerability, we think that will help in the influencing of hospital formulary committees and the like. With respect to specifics for reimbursement, we do believe that we will, as other products have, enjoy pass-through status for the first 3 years. And by which time, we would expect that a more permanent situation would have evolved in terms of J-codes and permanent codes that could be used. We believe there is a possibility that in the ASCs, we would enjoy permanent pass-through status, but there's still some clarification of the interpretation of that legislation. And we are hopeful that with the election now past that, as we get into '19, perhaps Congress will turn on the opioid front, which I think is a topic that can unite both sides of the aisle as they will turn to addressing possibilities for the affiliated outpatient hospital surgical centers to have such a feature as well. Did I cover your question?

Yes.

Our next question comes from Leland Gershell of Oppenheimer & Co.

First question, just on the CDMO side. I know you're not giving guidance quite yet for next year, but perhaps you could speak a bit qualitatively about the benefits you may see from a business perspective with the new facility in terms of contracts or any new business you may be generating from that new facility.

Sure. So we have been very happy with how the business has performed this year. And while new business contributes to it, also the solid business that we have had from our numerous customers has been a big part of that. And based on their current forecast, we would be optimistic about 2019. Having the opportunity to show growth off of these kinds of numbers, we believe that we will continue to sell new business. So it's a robust proposal volume, and we have been getting reasonable conversions. So we would expect that between both sides of the business there would be solid opportunity for growth in 2019.

Okay. Great. And then one question on the pipeline. With the NMB agents heading into the clinic next year, are you able to give us any further color in terms of time line of when we might see initial data? Presumably, these will be Phase I safety studies. Could we see data prior to the end of the year in light of these compounds?

So a good question. So the first program that will be clinically initiated is likely to be the RP1000 program, and that program is -- has already been in human subjects previously. This would be a further dose-escalation study. When Cornell had done the earlier studies, they had hit a threshold where they didn't have additional tox to support taking the dose higher. We have since done those tox studies and believe that we'll have the opportunity to dose escalate so that we can look at getting to the multiples of the dose that anesthesiologists would want to know they had a margin for, for further use. If that trial is able to initiate on time, which right now we have no reason to believe that it won't be, we should see data certainly before the end of the year. These studies pretty much don't allow you to do more than a certain number of subjects in a week because of restrictions on available OR time, which you have to have so that you have all the resuscitation equipment available as you're doing those. The RP2000 compound, that will be the first-in-man study. And it is quite possible that, that will be taking place in Europe. But again, we would expect to have that data before the end of the year.

Our next question comes from Scott Henry of Roth Capital.

I'll start with just a couple of modeling questions. It looks like gross margins were pretty strong in Q3, even with revenues down from 2Q. How should we think about gross margins for the CDMO business given this particularly strong quarter? Although it does seem Q3 has been strong historically.

Thanks, Scott. It -- so right now we are anticipating our gross margins to be consistent with the prior year, kind of in the mid-40s range. Certainly, as we continue to reprioritize and refocus and redeploy our efforts on our business development activities in Gainesville, I think it's really appropriate to really look at that business more on an operating margin business rather than on a gross margin business, just by the nature of how those costs are incurred by that plant. Essentially, all of the operating costs for that plant are focused on revenue-generating activities. So it's really more appropriate to look at it as an overall kind of, whether it's EBITDA or operating margin basis, rather than on an individual gross margin basis as we start to prioritize and redeploy efforts on some of these new business development opportunities.

Okay. Great. And then looking at G&A, about how much of that was preselling expenses? I'm just trying to get an idea of what the G&A annual rate is once product is being sold. Can I get an idea of what that base number is?

I think if you were to look at the second quarter G&A amount, keep in mind, in the first half of the year, we had some significant G&A spending as we were preparing for the precommercialization marketing and launch efforts. We saw that drop dramatically through cost efficiencies and us being very prudent with our expenses, in the second quarter, it dropped. I would say, the precommercial activities dropped by about $5 million of the roughly $6 million drop. Certainly, as we look out for the rest of this year, I think maybe the fourth quarter would be consistent with the fourth quarter of 2017. But as we start to ramp back up for the potential launch of meloxicam, it would be reasonable to expect that those costs would increase again.

Okay. Great. And then a final kind of modeling question. The change in contingent consideration continues to bounce around. How should we kind of think about that going forward?

You don't want my editorial opinion on that, do you, Scott? We'll let Ryan answer that officially.

So if you look at the current quarter, it was about a $4 million increase in the contingent consideration line, which was principally driven just by a change in the time value of money in terms of our modeling. And as you recall, last quarter, 2 things happened that we needed to take into account into our modeling. One was the CRL, but the other was the expansion of the IP for the patents, including the Orange Book listable patents that we announced in May 2018. So kind of both of those factors played into the contingent consideration calculation and has somewhat -- as we continue to get closer to the PDUFA date and launch, we're taking into account the time value of money. So the $4 million increase was solely related to that for this quarter. As we think about the $45 million milestone payment to ALKS, we would expect upon approval that the short-term portion of contingent consideration, which is currently on the balance sheet, a little over $30 million, would approach or start to equate to that $45 million. So it's possible that you would see in the first quarter of next year a $12 million to $15 million increase in that contingent consideration. But again, that's the noncash charge to the P&L.

Okay. Great. And then just quickly on the pipeline. I had in my pipeline sheet this Phase IIIb kind of colorectal orthopedic trial for IV meloxicam. What -- is that still on track? Or how should we be thinking about that trial? I'm not sure how that changed with the recent developments.

Yes. Good question. And so there were 2 trials. One of them is a total knee replacement trial. That's the orthopedic one, and the other one is bowel resection trial. And both of those trials are still ongoing. We did not -- if we had gotten approval back in May, we would have taken certain steps, such as we've taken during development, to increase the number of centers and put sort of full-court press on. And that would have cost us more money. So obviously, in a cash conservation mode, we did not take those steps. We've continued to work with the centers that we were working with. And they do continue to enroll, but the pace is slower. We believe that it would still, even at this pace, allow us to have data from those studies at hand sometime in the midyear time frame to early second half of 2019. And we still have some levers that we could pull to accelerate it if we needed to. But at this point in time, it doesn't make sense, I don't think, to escalate the spend associated with those trials.

Our next question comes from Ken Trbovich of Janney.

Just curious, I guess, first off, on the $2 million in precommercialization costs associated with IV meloxicam at commercial scale. I guess the question pertains to utilization. But can you remind us what the dating on the shelf life is? And I'm assuming this product would be salable post approval?

So it is our assumption that this product that's being built would be commercial supply, but it has to get charged to R&D in advance of approval because there is no alternative use for it at this moment in time. And Ken, the dating remains to be seen upon approval. We have -- we believe that we'll see somewhere between 30 months and 48 months as the dating that we'll have for the product. But some of that depends on the degree of conservatism with which FDA interprets the information on the extractables and leachables, which we gave to them. The most conservative, we believe, will be 30 months. And otherwise, we have very strong support for the product stability through 48 months.

Got it. And then just from an accounting treatment, just to make sure I fully understand Ryan's comments earlier. Ryan, when you talked about the idea that the contingent consideration would approach the value of the $45 million milestone, that suggests then that we're not going to see at all the sort of onetime hit on R&D if that's already been accounted for in the contingent liability in the prior quarters and the preceding quarters?

Yes. When you pay that $45 million, it will come off the balance sheet. It won't go through the P&L and that -- and it's...

It won't be in the P&L?

That's right. It's in the -- that contingent consideration is in a separate line to -- on the P&L, not within R&D.

Okay. And is there anything unique about the treatment of the ongoing royalties or milestones that we need to keep in mind from a commercialization standpoint for those payments -- future payments that will be due to Alkermes? Is it just the milestone that will be treated that way? Or will there also be some component of the royalty that's treated that way as well?

Yes. Before I let Ryan give the technical answer, this is so why I hate contingent consideration because while I respectfully acknowledge the public accounting implication, it just makes life so much more difficult. But Ryan, can you talk about...

Right. It's not real until it's real. I totally understand, Gerri.

Exactly.

Yes. So with the royalties and then, keep in mind, there are some sales-based milestones as well but will continue to still be evaluated from a contingent consideration line. We're still working through the final accounting treatment on how we will kind of push those costs through the P&L, so to be determined. But yes, the contingent consideration line will continue on, and there will be a short-term portion that's representative of not only perhaps the royalties but the sales-based milestones as well and the likelihood of achieving such.

And then last question for Gerri. Just on the recent ADCOMS and the outcomes for [oliceridine] and Dsuvia, anything at all? I mean, these are opioid-based products. So I'm sort of reluctant to even bring it up. But anything at all that can be taken from that?

That's just a great opportunity for me to put my foot in my mouth, but I'm going to try to resist habit. I think the frustration to those of us who were just observers and not in the midst of the fray was some degree of -- hard for us to understand some of the decision-making at the agency and especially given Dr. Gottlieb's PR around the approval of the AcelRx, sufentanil. it's just very hard to understand. I mean, we're in an environment where approximately 70,000 people die every year from on opioid overdose. And we have an opioid that is many multiples sufentanil's potency. And we're justifying on the basis of battlefield usage, but not restricting it to that. And we're looking at more deaths in a year from opioid overdose than individuals who died during the entire Vietnam War. And that's happening in 1 year. And I just really don't understand it.

Our next question comes from Patrick Trucchio of Berenberg Capital Markets.

Great. I have a couple of questions. I guess, first, just on the resubmission. Can you tell us what data or what change in the presentation of data did you provide FDA that made it decide additional clinical studies were not necessary to resubmit the NDA? And can you also tell us what the resubmitted NDA did to address the CMC-related questions on extractable and leachable data?

Sure. Within time constraints, yes. So we -- in the Type A meeting that we had with FDA where a variety of approaches and options were discussed, the agency indicated their willingness to consider whether language could resolve their concerns in the areas of onset of action and the diminution of action at the end of dosing for some patients. So based on that, we had reconfigured the labeling around dosage administration and provided data that was already within the 4 corners of the NDA, but in a couple -- more than a couple, but in updated table formats to make it easier for the agency, we hope, to see across studies consistency of results, time of onset, time of offset, et cetera. And so we believe that the data does support what we have put in the labeling and that it is responsive to the concerns that had been raised by the division around that. We'll obviously await further feedback on that, but we believe that this is in a pretty decent shape. With respect to the extractables and leachables, so the issue raised by the agency was raised by a nonclinical reviewer looking at an HPLC and seeing very small peaks that were below the International Conference for Harmonisation (sic) [International Conference on Harmonisation] levels at which one would qualify such substances and asking the question, could any of those small peaks have represented extractable or leachable items? There had been extensive extractable and leachable studies performed by Allon and further performed by Alkermes as part of the NDA submission. And based on that, we did not believe that this was warranted because you really had to go to forced degradation to get any kind of an extractable, very unusual conditions with massive changes in pH and things like that. Nevertheless, we worked with a group that is best known for doing investigations into these types of issues, who evaluated these peaks, provided data back to us, which was included in the NDA, that asserts that these little peaks could not contain an extractable or a leachable. Nevertheless, in an abundance of caution and the desire to show the agency our willingness to continue to be comprehensive, we will continue to surveil all for these agents when we review our routine testing for the next period of time until we get further feedback from them. So we don't believe that there were any extractables or leachables in those tiny peaks that we're seeing. The data that we've generated does not provide any evidence that they could be extractables or leachables, but we will, nevertheless, continue to surveil all for that. And all that information was included in the resubmitted NDA.

That's helpful. And I guess, just to look ahead a bit, assuming that you've address the agency's concerns and they approve the resubmission, how should we think about the various codes, the various reimbursement codes, the J-code, the C-code submissions? Are these codes vital for the launch? Or are they helpful to have? When should we anticipate dedicated or permanent codes? And how should we think about these codes in relation to the ramp and the launch in second quarter or through fourth quarter of next year?

Yes. So we believe that a decent portion of the usage that we will get during 2019 will come starting with the ASCs and then some early-adopting or nonrestrictive formulary committee hospitals. And there, our reimbursement team has worked to develop what will be temporary codes, but they can be dedicated codes fairly quickly after approval. We will also likely file for a J-code reimbursement before the end of this calendar year. That does require that we receive approval before -- I think it's before the end of May of 2019, in order for that code to be able to become effective in January of '20. So that would be a more permanent code. In the meantime, there will be a temporary code for inpatients. And the team on the reimbursement side as well as our key account managers have worked closely with formulary committees to understand what processing issues they may encounter. We think the ASCs will have more of that because they are not as often billing on pass-through as perhaps the hospital outpatient department might be used to for certain things. So we will be working with an outside group so that we don't have to handle any patient-specific information. They will be able to be available to answer questions and help any of the folks through the reimbursement process that require additional information.

That's helpful. And just a last one here. What's the status of the IV opioid and IV bupivacaine shortages? When are these shortages expected to ease? Should we anticipate perhaps a stronger ramp-up of IV meloxicam in the wake of these continued shortages of these IV pain treatments in 2019 or beyond? Or is that maybe not the right way to think about it?

Well, if I look at things like the Alkermes IV Tylenol usage, I would say, and from what we hear from hospitals on a continuing basis, they continue to have shortages of injectable opioid products. We don't have any specific information on when that may resolve. I would imagine that some of those manufacturers are looking at some other sites because our understanding had been that Hurricane Maria had taken out some capacity in Puerto Rico that has not been replaced yet. And I would wonder whether or not these plants will be able to be reconstructed given that -- because of all the water damage, they may have other contaminants in them. So we -- I can't really tell you anything about when that supply will be back online again. Similarly, for bupivacaine, we don't want to get people overheated in their expectations for what could be accomplished during launch year because it is a launch year. It's a new product. It's a new company. But we think that there will be some demand that will help us, that there are a number of institutions that were very keen to see IV meloxicam implemented into their programs for pain management multimodal analgesia because it gives them another tool to work with. It gives them another way to try to change the paradigm a bit so that perhaps they can avoid further opioid usage which they're interested in because it helps them to deal with patients out of the hospital more quickly as well as controlling their pain. So I think all these factors will play a role, but I wouldn't be saying fasten your seatbelts just yet on it but we think it will help us to the goals that we have for '19 and even further for '20.

There are no further questions. I'd like to turn the call back over to Gerri Henwood for any closing remarks.

Thank you, operator. Thank you all again for joining us here this morning. We look forward to talking with you again soon. Have a great day. Bye.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.