Recro Pharma, Inc. (NASDAQ:REPH), a pharmaceutical company with a high-performing, revenue generating contract development and manufacturing (CDMO) segment and an Acute Care segment, reported financial results for the three and six months ended June 30, 2019.

“Our CDMO business has delivered record results, generating $56.3 million in year to date revenues, a 36% increase from the comparable six-month period in 2018,” said Gerri Henwood, President and Chief Executive Officer of Recro Pharma. “We are very pleased with the sales performance to date this year and the trajectory of continued year over year growth. As such, we are raising our full year CDMO revenue guidance to $91-94 million. CDMO operating income, CDMO Adjusted EBITDA* and CDMO operating income, as adjusted*, for the first half of 2019 were $24.6 million, $26.6 million and $21.6 million, respectively, which are increases of 78%, 78% and 101%, respectively, compared to the same six-month period in 2018.”

“In the Acute Care segment, we have executed our restructuring plan and continue to anticipate the consolidated company being cash flow positive in the second half of the year. While we continue to pursue FDA approval for IV Meloxicam, we plan to spin out the Acute Care segment and have the CDMO business and the Acute Care business operate as two separately traded public companies,” concluded Ms. Henwood.

Second Quarter 2019 and Recent Events

Strong Gainesville Manufacturing Performance.  Recro’s contract manufacturing business continued to perform well with revenues of $31.3 million for the second quarter ended June 30, 2019, compared to $21.7 million for the second quarter ended June 30, 2018, a 44% increase from the comparable three-month period in 2018.

Restructured Acute Care Segment. Following receipt of the second CRL, Recro reduced the operating expenses of its Acute Care Segment, including a reduction in staff of approximately 50 employees.  Recro Pharma believes this initiative will significantly reduce its 2019 planned cash burn and anticipates becoming cash flow positive in the second half of 2019 (excluding the impact from any potential partnering or strategic transactions).

Second Quarter Financial Results

As of June 30, 2019, Recro had cash, cash equivalents and short-term investments of $32.4 million.

Revenues and cost of sales were $31.3 million and $14.1 million, respectively, for the three months ended June 30, 2019, compared to $21.7 million and $12.1 million for the three months ended June 30, 2018. The increase of $9.6 million in revenue was due to increased royalties recognized from two of our commercial partners and an increase in product sales to one of our commercial partners. Cost of sales increased primarily due to expansion of our service and development capabilities as well as growth in manufacturing demand, which was partially offset by operating efficiencies gained as a result of higher production volumes.

Research and development expenses for the three months ended June 30, 2019 were $7.2 million, compared to $10.2 million for the three months ended June 30, 2018. Excluding $2.6 million of costs associated with the strategic restructuring initiative recorded in the three months ended June 30, 2019, the decrease of $5.6 million was primarily due to a decrease in pre-commercialization manufacturing costs for IV meloxicam, shift of focus of our CDMO formulation and development capabilities to cost of sales activities, a decrease in development costs for other pipeline products and a decrease in personnel costs.

General and administrative expenses for the three months ended June 30, 2019 were $10.0 million, compared to $13.0 million for the same period in 2018. Excluding $3.4 million of costs associated with the strategic restructuring initiative recorded in the three months ended June 30, 2019, the decrease of $6.4 million was due to a reduction in commercial team personnel and related costs following the CRL, which suspended our preparation of the anticipated launch of IV meloxicam.

Change in contingent consideration valuation for the three months ended June 30, 2019 was ($4.1) million, compared to $0.4 million for the three months ended June 20, 2018. This non-cash expense was related to the change in the probability adjusted fair value of the contingent consideration that would be due to Alkermes upon passage of time or the achievement of certain milestones. The change in contingent consideration is primarily attributed to the change in estimated timing of potential FDA approval and a potential launch of IV meloxicam.

Amortization expense was $0.6 million for each of the three months ended June 30, 2019 and 2018.  This expense was solely related to the amortization of Recro’s royalties and contract manufacturing relationships intangible asset over its estimated useful life.

Interest expense, net, was $5.2 million and $2.1 million for the three months ended June 30, 2019 and 2018, respectively. The increase was primarily due to the higher principal balance on our Athyrium senior secured term loan and amortization of the related financing costs.

The Company records a full valuation allowance against its deferred tax assets therefore, there was no income tax benefit for the three months ended June 30, 2019. For the three months ended June 30, 2018, the income tax benefit was $2.7 million, which was recorded prior to the recording of the full valuation allowance for United States operations in the fourth quarter of 2018.

For the three months ended June 30, 2019, Recro reported a net loss of $2.8 million, or $0.13 per share, compared to a net loss of $12.7 million, or $0.62 per share, for the comparable period in 2018.

Financial Results for the Six Months Ended June 30, 2019

Revenues and cost of sales were $56.3 million and $28.5 million, respectively for the six months ended June 30, 2019, compared to $41.3 million and $22.6 million for the six months ended June 30, 2018. The increase of $15.0 million in revenue was due to increased royalties recognized from one of our commercial partners and an increase in product sales to various of our commercial partners. Cost of sales increased primarily due to expansion of our service and development capabilities as well as growth in manufacturing demand, which was partially offset by operating efficiencies gained as a result of higher production volumes.

Research and development expenses for the six months ended June 30, 2019 were $16.7 million, compared to $18.6 million for the six months ended June 30, 2018. Excluding $2.8 of costs associated with the strategic restructuring initiative recorded in the six months ended June 30, 2019, the decrease of $4.7 million was primarily due to the shift of focus of our CDMO formulation and development capabilities to cost of sales activities, a decrease in pre-commercialization manufacturing costs for IV meloxicam and a decrease in personnel costs, slightly offset by an increase in development costs for other pipeline products prior to the second CRL.

General and administrative expenses for the six months ended June 30, 2019 were $24.2 million, compared to $22.5 million for the same period in 2018. Excluding $4.4 million of costs associated with the strategic restructuring initiative recorded in the six months ended June 30, 2019, the decrease of $2.7 million was due to decreases in commercial team personnel and pre-commercial consulting costs incurred for the anticipated launch of IV meloxicam following the receipt of the second CRL. These decreases in costs were offset by increases in costs associated with the debt financing early in the year, public company costs including legal 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 our NDA for IV meloxicam.

Change in contingent consideration valuation for the six months ended June 30, 2019 was ($19.2) million, compared to $2.9 million for the six months ended June 20, 2018. This non-cash expense was related to the change in the probability adjusted fair value of the contingent consideration that would be due to Alkermes upon passage of time or the achievement of certain milestones. The change in contingent consideration is primarily attributed to the change in estimated timing of potential FDA approval and a potential launch of IV meloxicam.

Amortization expense was $1.3 million for each of the six months ended June 30, 2019 and 2018. This expense was solely related to the amortization of Recro’s royalties and contract manufacturing relationships intangible asset over its estimated useful life.

Interest expense, net, was $8.8 million and $4.0 million for the six months ended June 30, 2019 and 2018, respectively. The increase was primarily due to the higher principal balance on our Athyrium senior secured term loan and amortization of the related financing costs.

The Company records a full valuation allowance against its deferred tax assets therefore, there was no income tax benefit for the six months ended June 30, 2019. For the six months ended June 30, 2018, the income tax benefit was $5.1 million, which was recorded prior to the recording of the full valuation allowance for United States operations in the fourth quarter of 2018.

For the six months ended June 30, 2019, Recro reported a net loss of $4.8 million, or $0.22 per share, compared to a net loss of $25.2 million, or $1.27 per share, for the comparable period in 2018.

Financial Guidance

For 2019, Recro Pharma is increasing its revenue guidance from $85-$87 million to an anticipated $91-94 million, CDMO Operating Income from $28-$30 million to $35-39 million and CDMO EBITDA, as Adjusted* from $38-$40 million to $44-46 million, based on current trends including organic growth from existing customers and new business prospects. This guidance takes into consideration existing contracts and timing of customer order patterns, as well as the Company’s experience with customer’s product market estimations.

*CDMO Operating Income, as adjusted, and CDMO EBITDA, as adjusted are non-GAAP financial measures (See reconciliation of non-GAAP financial measures in this release).