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Edited Transcript of REPH earnings conference call or presentation 10-May-19 12:00pm GMT

Q1 2019 Recro Pharma Inc Earnings Call

Malvern Jun 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Recro Pharma Inc earnings conference call or presentation Friday, May 10, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Geraldine A. Henwood

Recro Pharma, Inc. - President, CEO & Director

* Ryan D. Lake

Recro Pharma, Inc. - CFO

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Conference Call Participants

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* David A. Amsellem

Piper Jaffray Companies, Research Division - MD and Senior Research Analyst

* Leland James Gershell

Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst

* Patrick Ralph Trucchio

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Scott Robert Henry

Roth Capital Partners, LLC, Research Division - MD, Senior Research Analyst & Head of Pharmaceuticals Research

* Claudia Styslinger

Argot Partners, LLC - IR Associate

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Presentation

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Operator [1]

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Good morning, and welcome to the Recro Pharma First Quarter 2019 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded at the company's request.

I would now like to turn the call over to Claudia Styslinger, Investor Relations. You may begin.

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Claudia Styslinger, Argot Partners, LLC - IR Associate [2]

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Good morning and thank you for joining us on today's conference call to discuss Recro's First Quarter 2019 Financial Results. This is Claudia Styslinger, 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 for questions.

Earlier this morning, we issued a press release detailing our financial and operating results for the 3 months ended March 31, 2019. The press release is available on the News and 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 on 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 products' 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 any words of other -- 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 and Management's Discussion and Analysis of Financial Condition and Results of Operations sections of Recro Pharma's Annual Report on Form 10-K for the fiscal year ended December 31, 2018, 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, May 10, 2019, 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 3 months ended March 31, 2019. Specifically, we may discuss operating income as adjusted, which is operating income without the impact of ASCO #2014-09, and the earnings before interest, taxes, depreciation and amortization and noncash stock-based compensation, or EBITDA, as adjusted for our contract development and manufacturing organization, or CDMO business. We believe these non-GAAP financial measures are helpful in understanding 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 operating income as adjusted and EBITDA as adjusted to the GAAP measures in a supplemental financial schedule, which has been made available on the News & Investors page of our website at recropharma.com.

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

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Geraldine A. Henwood, Recro Pharma, Inc. - President, CEO & Director [3]

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Thank you, Claudia, and good morning, everyone. Thank you for joining us on today's call. We'll begin today's call with an overview of recent accomplishments within the CDMO segment. The manufacturing business is off to a strong start in 2019, generating first quarter revenues of $25.1 million, a 28% increase compared to first quarter of 2018. The growth of the CDMO segment continues to accelerate as a result of strong demand within the existing portfolio and growth in new business development activity.

In addition to these solid revenues, we recently announced that Recro Gainesville executed a new 6-year extension to its existing license and supply agreement with Teva Pharmaceutical. Under the terms of the extended agreement, Recro Gainesville will continue to supply Teva with Verapamil SR capsules through 2024, and Teva will continue to be Recro Gainesville's exclusive U.S. distributor of the product. This amendment provides to Recro Gainesville the same revenue economics as the original agreement, including both manufacturing and profit sharing components. Teva is the largest generic pharmaceutical company in the world and continues to do a tremendous job as our exclusive marketing partner for Verapamil SR. Over the past few years, we've maintained a close working relationship with Teva, and they've delivered strong product volumes through their own parallel distribution channel. This contract extension is important because it speaks to Recro Gainesville's ability to maintain high quality standards, consistently deliver product on time and meet increasing demand from our customers. We are delighted to continue working with Teva on Verapamil SR.

In addition to the Teva agreement, during the first quarter, Recro Gainesville also signed a 5-year manufacturing and supply agreement with another key customer, Novartis. Under the terms of this extended agreement, Recro Gainesville will continue to be the exclusive global supplier of Ritalin LA and Focalin XR capsules to Novartis through 2023. We are extremely proud to continue to be the strategic partner of choice and provide high-quality drug product for both Teva and Novartis.

Turning now to recent developments in the Acute Care segment. As many of you know, in March, we received a second Complete Response Letter from the U.S. Food and Drug Administration for our New Drug Application seeking approval for intravenous meloxicam, a non-opioid preferential COX-2 inhibitor for the management of severe -- moderate-to-severe pain. The second CRL focused on the onset and duration of IV meloxicam, FDA noting that the delayed onset failed to meet prescriber expectations for IV drugs in their opinion. The CRL also cited FDA's concerns about the role of IV meloxicam as a monotherapy in acute pain, given the FDA's interpretation of clinical trials data as well as how they see it would meet patient and prescriber needs in that setting. We do not agree with the FDA's interpretation of the data contained in the NDA package, nor its views on the clinical utility of IV meloxicam in the acute pain setting. It's our intention to continue pursuing regulatory approval for IV meloxicam while also working to secure a strategic partner for the potential commercialization of the asset. We remain fully committed to working closely with the FDA to determine the best steps forward for IV meloxicam.

In addition, in April, we announced a restructuring initiative for the Acute Care segment, following reduction in workforce along with our plans to seek a strategic partnership for the continued development and commercialization of IV meloxicam. The goal of the restructuring was to reduce operating expenses while keeping certain key personnel needed to secure a commercialization partner and obtain FDA approval for IV meloxicam. The head count reduction did not impact employees in the CDMO segment. As the result of the restructuring initiative, we are now expecting to become cash flow positive in 2019, which Ryan will discuss in more detail in just a few minutes. But before I turn it over to Ryan to discuss the financials, I'd just like to touch on a few other corporate and financial highlights from the first quarter. In early March, we secured new nondilutive capital through an amended and expanded credit facility with Athyrium in the amount of $125 million. The amendment substantially increased and fully funded the capital under the larger credit facility, providing $40.5 million in net proceeds upon closing.

And finally, Arnaud Ajdler joined our Board of Directors. Arnaud is a managing partner in Engine Capital and brings over 15 years of finance and corporate governance experience to our board. With that, I'll now turn it over to Ryan.

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Ryan D. Lake, Recro Pharma, Inc. - CFO [4]

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Thank you, Gerri. Good morning, everyone. Since we issued a press release earlier today and we'll be filing our 10-Q later today, outlining our full financial results, I'll just review some of the key first quarter highlights.

As of March 31, 2019, Recro had cash, cash equivalents and short-term investments of $58 million. Revenues and cost of goods sold were $25.1 million and $14.4 million, respectively for the first quarter of 2019 compared to $19.5 million and $10.5 million for the first quarter of 2018. The increase of $5.6 million in revenue was due to increased royalties recognized from one of our commercial partners and an increase in product sales to various commercial partners.

Cost of sales increased due to expansion of our services and development capabilities as well as growth in manufacturing demand. Research and development expenses for the first quarter 2019 were $9.6 million compared to $8.4 million for the first quarter of 2018. The increase of $1.2 million was primarily due to an increase in pre-commercialization manufacturing costs for IV meloxicam and a net increase in development costs for our other pipeline products. General and administrative expenses for the first quarter of 2019 were $14.2 million compared to $9.5 million for the first quarter of 2018. The increase of $4.7 million was due to commercial team personnel and pre-commercialization consulting costs in preparation of the anticipated launch of IV meloxicam; costs associated with the debt, financing, public company costs, including legal and audit fees; business development costs in our CDMO segment as well as increased professional fees associated with addressing the first and second CRLs issued by the FDA regarding the IV meloxicam NDA. We believe these increased first quarter 2019 expenses will not recur in 2019, although the majority of the recent restructuring and associated costs following the second CRL will be incurred in the second quarter of 2019.

For the first quarter of 2019, the company reported a net loss of $2 million or $0.09 per share compared to a net loss of $12.5 million or $0.65 per share for the same period in 2018. As of today, we are reiterating our revenue guidance for 2019, and it is expected to be in the range of $85 million to $87 million. We are also reiterating that the operating income is expected to be in the range of $28 million to $30 million; and EBITDA, as adjusted, is expected to be in the range of $38 million to $40 million. All of these projections are based on current CDMO business trends including organic growth in existing customers and new business prospects. This guidance also takes into consideration existing contracts and timing of customer order patterns as well as Recro's experience with customers' product market estimations. Due to the restructuring initiatives that Gerri mentioned earlier, we have significantly reduced our planned cash burn for 2019, and we currently expect to become cash flow breakeven during the third quarter of 2019 and cash-flow-positive during the second half of 2019.

This excludes the financial impact from many potential partnering or strategic transactions that may result from our IV meloxicam partnering activities or otherwise. I'll now turn the call back to Gerri for closing remarks. Gerri?

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Geraldine A. Henwood, Recro Pharma, Inc. - President, CEO & Director [5]

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Thanks, Ryan. In closing, we are pleased that our CDMO segment is off to a strong start in 2019 and the Recro Gainesville team will continue executing on their objectives to keep that business strong. In the Acute Care segment, despite recent challenges, we remain steadfast in our belief that IV meloxicam holds significant potential as a treatment option for moderate-to-severe pain and we remain committed to pursuing a path to regulatory approval. We believe non-Opioid pain products are an important tool for physicians and patients to safely and effectively manage pain in multiple clinical settings and dedicated to bringing IV meloxicam and possibly other non-opioid pain products to the markets to help address the crippling opioid epidemic that our country currently faces.

In parallel, Recro management and the Board are exploring and evaluating other possible corporate structures, including the possibility of a separate business unit for IV meloxicam and our other pharma pipeline candidates. We look forward to providing updates on all of these initiatives at the appropriate time in the coming months and quarters.

Thanks very much for your time and attention today. We'd now like to open the call for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Leland Gershell of Oppenheimer.

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Leland James Gershell, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [2]

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First, a question on the CDMO. Following the renewals of the existing contracts, I recall you still have unused capacity, both the older facility and then also the new 24,000 square foot that you're looking to expand business on. Wanted to ask if you could just give us some color on how potential agreements, contracts may be shaping up for that unused capacity later this year, and in relation to that, if margins potentially could be improved perhaps by newer business? If you could just discuss a bit where you think the EBITDA margins could keep up to? And then I have a follow-up.

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Geraldine A. Henwood, Recro Pharma, Inc. - President, CEO & Director [3]

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Sure. Thanks very much, Leland. So I'll take on the new business part, and then Ryan will talk about potential impact on margin. So if we look at the business development effort and its growth, we're very pleased with the effectiveness of our team. We had added some people last year and have added another individual this year, and find that their efficacy in terms of proposals and reasonable conversion rate is very strong. And so as you know, on the development side, often these projects start off small, and with good performance, the performance of the molecule continue to move along and grow in strength. So we look forward to that occupying more and more of the capacity associated with the development site that's just about a 6 to 10 minute drive from the plant. We do think that there are opportunities that could result in further occupation of some of the unused capacity in the Gould site, which is the main plant. And that would be involved with possible tech transfers. Those are not in hand yet, but we seem to be reaching final stages in a process where people are looking at multiple candidates. So hope that could become one of the conversions that could conceivably happen. Very likely, those would be early next year. As you know, tech transfer can take a while to get to happen. But Ryan, do you want to talk about margins and economic impact?

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Ryan D. Lake, Recro Pharma, Inc. - CFO [4]

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Yes. I mean I believe our CDMO has industry-leading gross margins amongst all, if not, most of our peers, because of the expertise that we bring to solving problems for our customers. The overall gross margins for the CDMO business continue to be very strong. They are in the low 40s, and they were in a similar range last year. We believe the margins will continue to be in that 40% range for 2019, based on our anticipated prospects for the year. Just generally speaking, overall cost of goods sold is impacted by expansion of our services and development capabilities as well as the growth in the manufacturing demand that we have, and as that increases and we use up more of that capacity, it can go right to the bottom line. So it really depends a little bit on product mix as well as we have higher production on certain more labor-intensive products as well, but it will depend a little bit on mix.

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Leland James Gershell, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [5]

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Okay. And then just one on IV meloxicam. With the concerns of the FDA particularly on monotherapy and looking at other non-opioid analgesics that have been approved in the IV setting, it looks like the difference there may be that those have been approved kind of with combination opioid and so forth. Just wondering if there's any contemplation of the strategy to do either a trial, will you include opioid, and therefore not be reaching so far as for the monotherapy label? Or if the sentiment is really to continue to pursue with a partner, of course, of sort of proposed label you had in mind at the outset?

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Geraldine A. Henwood, Recro Pharma, Inc. - President, CEO & Director [6]

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Sure. Good question, and the monotherapy statement by FDA, we don't believe to be fully accurate and fully appraising the data, not only from the pivotal but the other 3 efficacy trials that we have as well. One of which did include, although only for a 24-hour dosing period, did include morphine as the control agent. As you know, there are a variety of factors involved in how clinicians use products to manage moderate-to-severe pain in these days, particularly planned pain that -- such as results from surgery. So I think where we find ourselves right now is having to support from the clinical community for the understanding that the product has efficacy alone, but as is the case for many agents, would very likely be used in combination with other treatments. And in fact, our safety study, that 720-some patients study that we were asked to do, includes a background of multimodal analgesia as used at that institution normally for that procedure with meloxicam or placebo added on. So we do have experience, certainly from the safety side, showing no issues for use in a multimodal way; and in fact, also showing that there is still an impact on overall opioid consumption if you will proxy for additional efficacy even though that was a safety study. So we would -- we certainly would be open to a variety of constructs that we think could lead to commercial opportunity, presuming at this moment in time that it would be with a partner. But there has not been labeling dialogue with the agency, and so we will have to -- we believe continue to pursue the regulatory process in order to get to a point where we could more fully answer that. We think with 5 double-blind, placebo-controlled efficacy trials, we are not lacking data to characterize the efficacy of IV meloxicam, so we're just going to have to continue try and work through this with FDA and see where there is common ground that we can move forward on.

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Operator [7]

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And our next question comes from David Amsellem with Piper Jaffray.

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David A. Amsellem, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [8]

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So Gerri, just taking a step back, I guess with the disappointments of the FDA on meloxicam and what they're trying to do to reduce the burn, taking a step back from all of that, what aspirationally do you want the company to be? And you did talk about alternative structures. So should we take that to mean that, eventually there will be a separation, a formal separation of the CDMO business and the therapeutics business? I'm just trying to get a better sense of what does Recro want to be? Or really what do you want -- where do you want the company to go in terms of overall direction? And then secondly, just specifically on the CDMO business, can you just remind us what portion of the revenue and EBITDA mix Teva and Novartis, those products, take up? That would be helpful.

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Geraldine A. Henwood, Recro Pharma, Inc. - President, CEO & Director [9]

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Sure. Thanks, David. So first on the where are we going. So we have, as I think many of our listeners and many of you as analysts know, been listening to our shareholders who had been concerned about the impact of the CDMO being overshadowed in some ways by the pharma business that has not met with recent regulatory success. In listening to our shareholders and also feedback from a fairly large swath of external financial advisers that we have been in touch with, we believe that there is an opportunity for us to provide for maximizing shareholder value if we consider options that might include things such as 2 pure plays or some other construct that would allow each of these businesses to move forward without one interfering with either the value perception or the capital structure of the other. But those decisions are not firmly made, they are being evaluated pretty intensely and with great consideration. We continue to believe that CDMO business is a great business. What a wonderful opportunity to have come our way as we acquired IV meloxicam. We believe we've supported that business well, invested in it, and that investment is coming to fruit, and we believe that, that is warranted to continue. We also believe that IV meloxicam continues to have important potential as a commercial product. We, obviously, have to get through the regulatory process to be able to untap that. And given what has happened, we made the natural choice, as I think most companies would, to reduce the footprint of the -- particularly the commercial, but certain other parts of the organization that would have been very supportive of that commercial function, so that we could regroup and have an opportunity to consider these options and a way to move forward and to monetize value, not only for IV meloxicam but also continue to be very excited about the potential for the NMBs. But it appears to us, it's not likely that we will be able to do that under one uniform blended structure; that might not be the best way. Again, the Board has not yet taken these decisions, but is very carefully considering the options and the ways to move forward. So I don't know that I have given you a perfect answer to that, David, but trying to be responsive. And I'll ask Ryan to just speak to the CDMO, Teva and Novartis concentration.

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Ryan D. Lake, Recro Pharma, Inc. - CFO [10]

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Yes, I mean, I believe both Teva and Novartis are very big and very strong customers, and we have really great relationships with those companies both, as evidenced by the new contracts that we have. And really, it's credit to the GM down in Gainesville being able to rally the troops down there and the employees' dedication there. Those are exclusive supply arrangements with both Teva and Novartis. Teva represents or represented at the end of last year 48% and Novartis 38% of the revenue contribution.

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David A. Amsellem, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [11]

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Okay. That's helpful. And then let me just sneak in a follow-up. So I know that you've -- we've gone through all of the issues with the FDA and your thoughts, Gerri, on the body of data. But we've seen CRL for IV meloxicam, we've seen a CRL for Heron's HTX-011. Do you get the sense that the division is just, in general, moving the goalposts on acute pain products or maybe pain, in general? I mean I'm just trying to get a better sense as to what is happening at the division level, and why we are seeing what we're seeing?

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Geraldine A. Henwood, Recro Pharma, Inc. - President, CEO & Director [12]

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A very good question. Of course, from our seat at the table, we do not believe that we have failed to provide data requested by FDA, incorporate aspects of the program that FDA has wanted in individual protocols, et cetera. So do feel a bit stymied by the current feedback that we're getting from them. I haven't had this kind of a dialogue, specifically with Teva, and we have had some exchanges between the teams but on other issues. But it does not feel entirely like there's a total consistency between congressional approaches and attitudes as evidenced by the legislation last fall, the commissioner's office and other senior FDA officials, and kind of where we're going. That is, of course, never a substitute for having good data. We understand that, and we don't disagree with FDA that they should not be lowering standards for products that are non-opioid. In our own belief, meloxicam would not require any lowering of standards. We think it's a very well-described, well-studied product that has benefit. But I do think they are human beings, and there's always a possibility that attributes to certain drug classes are not shared by others and could that be having an influence, I can't really say.

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Operator [13]

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And our next question comes from Scott Henry of Roth Capital.

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Scott Robert Henry, Roth Capital Partners, LLC, Research Division - MD, Senior Research Analyst & Head of Pharmaceuticals Research [14]

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Just a couple of questions on the CDMO business. First, the numbers were very strong in Q1, and we haven't typically seen seasonality favoring Q1. So the question is, is there a reason to think the business won't be as strong going forward? Or are you perhaps just being conservative with your guidance?

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Geraldine A. Henwood, Recro Pharma, Inc. - President, CEO & Director [15]

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Well, good question, Scott. And I think if we look at the business and over the course of the year, there is some variability that happens quarter-to-quarter in this business. And we're not at a point right now where we could exclude that there could be a little bit of that, but clearly, we also think the business has been very strong in the first quarter. Some of the new business, early introduction, is helping that, but obviously, the big part of the business that's moving is what has been the big part of the business, and we can't take entire credit for that. We have these great customers who are taking and selling the product and creating pull-through on it. So that's all a positive. It isn't easy for us to sit here and say, "Oh, yes, this is just exactly what we're going to see for the rest of the year." We do know that often in fourth quarter people back off of what has been their ordering pattern in other parts of the year a little bit because they don't want to be stuck with too much inventory at the end of the year. We don't know of anything that's going to be a dip in the business, but we also don't know everything. We only have locked in business for the next quarter, although the pattern, generally, is pretty good year-over-year. Ryan, do you -- is there anything you want to add to?

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Ryan D. Lake, Recro Pharma, Inc. - CFO [16]

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No. That's good.

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Scott Robert Henry, Roth Capital Partners, LLC, Research Division - MD, Senior Research Analyst & Head of Pharmaceuticals Research [17]

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Okay.

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Geraldine A. Henwood, Recro Pharma, Inc. - President, CEO & Director [18]

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So we're trying not to be too chicken, but we're very happy with how the business has been doing.

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Scott Robert Henry, Roth Capital Partners, LLC, Research Division - MD, Senior Research Analyst & Head of Pharmaceuticals Research [19]

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Okay. Great. I appreciate that color. And just a couple kind of mechanical questions on the EBITDA. I mean as the CDMO becomes your main business and the acute care becomes the minority contributor, at some point, when you calculate EBITDA, will you have to shift kind of your corporate overhead on to that business? And maybe you've already done that, but it would seem like some of that overhead would get layered into CDMO at a certain point. Just curious how that works, accounting wise?

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Ryan D. Lake, Recro Pharma, Inc. - CFO [20]

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Yes. I mean, it's something we're continuing to evaluate, Scott. And I think as we continue to look to see what the new normal looks like, we can provide additional updates on that. Certainly, there would be some additional costs if you were -- to that EBITDA, if you are going to run it as a stand-alone public company, but not significant.

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Scott Robert Henry, Roth Capital Partners, LLC, Research Division - MD, Senior Research Analyst & Head of Pharmaceuticals Research [21]

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Okay. So right now, basically, all those costs are the Gainesville costs. Is that fair?

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Geraldine A. Henwood, Recro Pharma, Inc. - President, CEO & Director [22]

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That are in the EBITDA calculation?

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Ryan D. Lake, Recro Pharma, Inc. - CFO [23]

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Yes. That's correct. Yes. A lot of the -- the public company costs are included in the Acute Care segment.

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Scott Robert Henry, Roth Capital Partners, LLC, Research Division - MD, Senior Research Analyst & Head of Pharmaceuticals Research [24]

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Okay. And then when I look at the disclosure, it looks like the numbers have changed a little historically, maybe it's just my notes. But has there been any change in the way that EBITDA is calculated? It actually looks lower a year ago than I had in my numbers, but maybe I had it incorrect.

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Ryan D. Lake, Recro Pharma, Inc. - CFO [25]

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The only change that we made at the end of last year, as you'll probably recall, Scott, is we started excluding the impact from the adoption of 606 as well as stock compensation. So both of those items are included in the EBITDA calculation.

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Operator [26]

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And our next question comes from Patrick Trucchio of Berenberg Capital.

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Patrick Ralph Trucchio, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [27]

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Just a few follow-up questions on the CDMO business. So first, can you remind us what the capabilities are in each of the Gainesville facilities, including the 97,000 square foot facility and the 24,000 square foot facility? And then secondly, you've discussed the potential to expand utilization of these facilities. Can you tell us what the capacity utilization is today in each facility, and what the maximum utilization possible could be? And then finally, is the intention to eventually expand the utilization such that this maximum is reached? And how long can that take in terms of years?

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Geraldine A. Henwood, Recro Pharma, Inc. - President, CEO & Director [28]

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Well, that's a mouthful, Patrick. Thank you. So I'll try to take it bit-by-bit, and if I miss something, I know you'll hold me to it. So feel free to ask a follow-up. So let's talk about, the 97,000 square feet represents the Gould Drive site, which is the historic main manufacturing facility for the business. Of that 97,000 square feet, just about 10,000 square feet represents necessary utilities and facilities and mechanical repair units that are associated with the plant, but it's 87,000 square feet of GMP space and GMP warehouse. The capabilities at Gould are associated with DEA-controlled substances. They are able to handle those. The context is solid oral dosage form. So capsules, extended release of particular specialty of the formulations team there and they have solved a number of problems, including for the historic products that we have, but also for some forward dosage forms that may become commercial products that would be there. Capsules represent the highest number of units, and these extended release capsules have varying constructs in terms of extended release units that may be in those capsules. And we also have tablet and coated tablet and conceivable bilayer tablet, although we don't currently do commercial products. We've done a number of other noncommercial products on that equipment but are evaluating some tech transfers in the commercial on the tableting equipment.

The team there also does in-house analytical testing, so method development or tech transfer of methods for commercial products, the release testing, stability testing is done in-house, the testing of ingredients to be included in batches, et cetera. So think of that facility as a large, virtually exclusively commercial manufacturing facility that can handle complex dosage forms and can handle controlled substances as well. Then we look at what we call the Chestnut facility, which is the development and high potency facility. So that 24,000 square foot facility is roughly split in half. One half of that facility is development services that include a portion of non-GMP but the bulk would be GMP small scale, such as for clinical trials, supplies, those manufactured packaging and clinical trials packaging or small-scale packaging that could be done, stability testing, analytical testing, formulation development, particularly in the context of intending to move onto IMV filing or intending to move into later-stage human trials. In general, on the development side, it's unlikely that we will do much other than up to early Phase III -- later Phase III, we would envision to be able to move over to the commercial plant. Commercial plant currently is roughly 70% of capacity on one shift. They have historic run 2 shifts and are available to do that and that would now be problematic. Theoretically, there is a third shift as well. So there's plenty of capacity in the main plant. In general, the equipment trains are similar. Obviously, skills would be different in the development facility than the main facility, but -- so it's a sort of start with -- stay with because we can help you move that product along quickly, well and with an eye to commercial processes and industrialization that one would need if the product is going to get there.

Some facilities are unable to help companies who maybe need some early, for instance solo testing of formulations and things like that. That's something that we're also in a position to do on the development side. So that gives you a sort of thumbnail of the development side. Capacity calculation there is hard because we just opened that in October. We're not near 100%, I can tell you that for sure. We would love that, but a lot of those projects tend to be sort of smaller scale, involving different disciplines to move along. So it depends on, like, are we doing the analytical method development that might precede the formulation development, so you could test the formulation. Then you are doing the dosage form to solution analytical, then you're going to one of the suites to make batches or GMP batches. So it depends a little bit, but I would say we're still early in the absorption curve. But it's not inconceivable that within a year from now we would be better than breakeven or in the development side of that facility. We're making really good progress towards that. The other half of that facility at Chestnut is a portion dedicated to high potency products. So products that require isolation and airlocks and things like that, so that those products which could either provide a risk of cross-contamination or provide a risk to subjects involved with the manufacturing. It's set up so that people can be wearing PPE so that the rooms can be -- go through the kind of cleaning validation you would need for those and dedicated equipment that would stay associated with that side of the business, and it has its own separate warehouse portion for that, both for API and for any drug product that will be produced.

Similarly, they have the ability to do formulation and analytical development as well as pilot batches all the way through medium scale GMP batches. We would not take the batches from -- or the products from there back to Gould, because Gould is not set up for high potency manufacturing, but there is an option for a facility to be within several thousand feet of that facility, which could quite inexpensively be put up to be able to do dedicated manufacturing on a larger scale for high potency products. We use that option because of space being quite inexpensive in Gainesville, is not costly, we think right now it makes more sense to get more throughput. That high potency facility just fully opened just in the last month, in the end of March. And so we'd like to see more business coming through and then look at pull-through needs that have been. As you know, for this facility, we were able to do the conversion to a high-quality facility very quickly because we didn't have to come out of the ground on it. So we think that could be conceivable if it were to be even. So I hope that answers your question.

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Patrick Ralph Trucchio, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [29]

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Yes. That's very helpful. And then just one more follow-up. So earlier you mentioned that Teva and Novartis combined are around 85% of the total business, and also you mentioned your great relationships with both customers are very important. I'm wondering if the intention is to diversify and expand the customer base in 2019 and beyond, and how quickly this would be possible to accomplish? What the right percentage exposure per customer would be ideal in your view?

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Geraldine A. Henwood, Recro Pharma, Inc. - President, CEO & Director [30]

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Yes, it's a good question. Obviously, we don't want to diversify by cutting the -- or curtailing, in any way, the relationships that we have with Teva or Novartis. And in fact, often a business development principle is, it's easier to get more business where you already have business because people are familiar with you, you've got quality relationships as well as consistency of ability, supply relationships. So we are discussing possibilities of other products with our current partners. That could lead to customer concentration but diversification of further products beyond the number of SKUs that we do of the extended release Verapamil for Teva and the different dose forms of each of the 2 products we do for Novartis. But we do, as a general rule, on the new business side, each of our BD people have come in with good familiarity to the kinds of businesses that would be a good match for the kinds of problem solving that we do. And we look at it that way because if we can partner with the customer to solve a problem around, "Yes, I'd like the dosage form to last longer. I'd like it to be absorbed better. I'd like it to perform in X, Y, Z kind of way." Or add this really complex 2 component combination product that I need to give twice a day instead of each component 2 times or 3 times a day or whatever it maybe. I think those are solutions we can have. And there does seem to be good resonance with companies that are well funded but smaller than some of the behemoths who are looking for a human-sized company that they can deal with good skill sets, good ability to see through to, I could stay here and do commercial product if I get to that point. But that early on, we can be -- we know that time is money for young companies and we can be timely in what we do. We can move faster, and we don't face some of both the overhead and the time slot burdens that exist for some of the very large companies in this space. And that seems to be resonating, and I believe is getting us a cadre of additional customers right now. That's not a double-digit number of new customers, but we're working to exceed that as we'd like to have a good balance of customers coming in with good pipelines, interested in partnering, potentially on one product or more than one product as we go down, but there does not seem to be a paucity of opportunities out there right now.

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Operator [31]

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And we are showing no further questions. I'll now turn the call back to Gerri for closing remarks.

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Geraldine A. Henwood, Recro Pharma, Inc. - President, CEO & Director [32]

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Thank you, operator. In closing, we're pleased that our CDMO segment is off to a strong start. We're really happy for their performance, and since we have no further questions, I'd like to thank all of you for having joined today and look forward to the opportunity to speak with you in the coming days. Thanks very much, everyone. Have a great day.

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Operator [33]

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Ladies and gentlemen, thank you for your participation in today's conference. You may now disconnect. Everyone, have a wonderful day.