REPH: Recro Pharma Analysis and Research Report

2018-08-20 - by Asif , Contributing Analyst - 166 views

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Overview

Recro Pharma is a specialty pharmaceutical company that operates through two business divisions: an Acute Care division and a revenue-generating CDMO division. Each of these divisions are deemed to be reportable segments for financial reporting purposes.

The company's Acute Care segment is primarily focused on developing and commercializing innovative products for hospital and related acute care settings. The company's lead product candidate is a proprietary injectable form of meloxicam, a long-acting preferential COX-2 inhibitor. IV meloxicam has successfully completed three Phase III clinical trials for the management of moderate to severe pain, consisting of two pivotal efficacy trials and a large double-blind Phase III safety trial, as well as other safety studies. Overall, the total new drug application, or NDA, program included over 1,400 patients. In late July 2017, the company submitted a NDA to the U.S. Food and Drug Administration, or FDA, for IV meloxicam 30mg for the management of moderate to severe pain. In May 2018, the company received a CRL from the FDA regarding its NDA for IV meloxicam. In July 2018, the company participated in a Type A End-of-Review meeting with the FDA to discuss the topics covered in the CRL. The company plan to provide an update on its path forward following receipt of the written meeting minutes. The company's Acute Care segment has no revenue and its costs consist primarily of expenses incurred in conducting its manufacturing scale-up, clinical trials and preclinical studies, regulatory activities, pre-commercialization of meloxicam and personnel costs.

The company's CDMO segment leverages formulation expertise to develop and manufacture pharmaceutical products using proprietary delivery technologies for commercial partners who commercialize or plan to commercialize these products. These collaborations result in revenue streams including manufacturing, royalties, and research and development, which support continued operations for its CDMO segment and have contributed excess cash flow to be used for its research and development activities in its Acute Care segment. The company operate a 97,000 square foot, DEA-licensed manufacturing facility in Gainesville, Georgia and the company currently develop and/or manufacture the following key products with its commercial partners: Ritalin LA®, Focalin XR®, Verelan PM®, Verelan SR®, Verapamil PM, Verapamil SR and Zohydro ER®, as well as supporting development stage products. The company's CDMO segment’s revenue streams are derived from manufacturing, and royalty revenues, as well as research and development services performed for commercial partners.

Recro Pharma has incurred losses and generated negative cash flows from operations since inception and expect to continue to incur significant and increasing operating losses for the foreseeable future. Substantially all of its operating losses resulted from costs incurred in connection with its development programs, including its non-clinical and formulation development activities, manufacturing, clinical trials and pre-commercialization activities. Recro Pharma has used revenue generated by its CDMO segment primarily to fund operations at its Gainesville, Georgia manufacturing facility, to make payments under its previous credit facility and to partially fund its development and pre-commercialization activities of its Acute Care segment. The company believe its CDMO segment’s revenue will continue to contribute cash for general corporate purposes that may, to some extent, reduce the amount of external capital needed to fund development and commercial operations. The company expect to incur increasing expenses over the next several years as the company seek to resolve the CRL issued by the FDA with regard to the NDA for IV meloxicam, obtain regulatory approval for IV meloxicam, successfully commercialize IV meloxicam, if approved, and continue to develop its other current and future product candidates.

On April 10, 2015, the company completed the acquisition from Alkermes of certain assets, including the worldwide rights to injectable meloxicam and the development, formulation and manufacturing business that comprised its CDMO segment, which the company refer to as the Gainesville Transaction, which transformed its business through the addition of a revenue-generating business and the increase in its workforce as a result of the addition of the employees at its Gainesville, Georgia manufacturing facility. The consideration paid consisted of $50.0 million cash, a $4.0 million working capital adjustment and a seven-year warrant to purchase 350,000 shares of its common stock at an exercise price of $19.46 per share. In addition, the company may be required to pay up to an additional $125.0 million in milestone payments including $45.0 million upon regulatory approval of IV meloxicam, as well as net sales milestones and a royalty percentage of future product net sales related to IV meloxicam.

The company funded the up-front payment of the Gainesville Transaction with borrowings under its previous credit facility with OrbiMed Royalties, II, LP, or OrbiMed, and cash on hand. Pursuant to the credit facility with OrbiMed, the company issued OrbiMed a warrant to purchase an aggregate of 294,928 shares of its common stock at an exercise price of $3.28 per share, subject to certain adjustments. In April 2018, OrbiMed fully exercised the warrant on a cashless basis, surrendering 80,213 shares to cover the aggregate exercise price, and resulting in the issuance of 214,715 shares of common stock.

In November 2017, the company entered into its Credit Agreement with Athyrium Opportunities III Acquisition LP, or Athyrium, pursuant to which the company drew $60.0 million in an initial term loan. The company also have the ability to draw upon two additional tranches of the terms loans, each in the aggregate original principal amount of $20.0 million. Pursuant to the terms of the credit agreement, the company may draw upon the second $20.0 million tranche on or before December 31, 2018, provided that the company receive regulatory approval for IV meloxicam and retain at least $20.0 million in unrestricted cash following payment of the $45.0 million milestone payment to Alkermes. The company may draw upon the final $20.0 million tranche on or prior to March 31, 2020, provided that Recro Pharma has drawn on the second tranche and have achieved net sales for IV meloxicam of $20.0 million in the most recent trailing twelve-month period. The company used the proceeds from the initial term loan to repay in full all outstanding indebtedness and transaction fees under the previous credit facility with OrbiMed. The interest rate under the credit agreement with Athyrium is equal to three-month LIBOR plus 9.75%, with a 1.0% LIBOR floor. Pursuant to the credit agreement with Athyrium, the company issued to each of Athyrium and its affiliate, Athyrium Opportunities II Acquisition LP, warrants to purchase an aggregate of 348,664 shares of its common stock at an exercise price of $8.6043 per share, subject to certain adjustments.

Liquidity and Capital Resources

As of June 30, 2018, the company had $48.9 million in cash and cash equivalents.

Since inception through June 30, 2018, Recro Pharma has financed its product development, operations and capital expenditures primarily from sales of equity and debt securities, including sales of its common stock with net proceeds of $127.5 million, and term loans made under its previous and existing credit facilities, including its credit facility with Athyrium with an outstanding balance of $60.0 million. Revenues from its CDMO segment are used primarily to fund operations at its Gainesville, Georgia manufacturing facility, to make payments under its credit facility and to partially fund the development and pre-commercialization activities of its Acute Care segment. During the six months ended June 30, 2018, its capital expenditures were $2.9 million.

The company will need to raise substantial additional funds in order to fund the payments which may become due, including milestone payments owed to Alkermes or other licensing partners, to continue or commence its clinical trials of its product candidates, to commercialize any approved product candidates or technologies and to enhance its sales and marketing efforts for additional products the company may acquire. Insufficient funds may cause it to delay, reduce the scope of or eliminate one or more of its development, commercialization or expansion activities. The company's future capital needs and the adequacy of its available funds will depend on many factors, including its ability to timely and adequately resolve the CRL issued by the FDA regarding its NDA for IV meloxicam, the cost of studies and other actions that may be needed to obtain regulatory approval for IV meloxicam or its other product candidates in development, the timing of approval of IV meloxicam, the level of market acceptance of IV meloxicam and the costs of commercialization activities for IV meloxicam, if approved, the continued profitability of its CDMO segment, and its ability to access additional tranches under its Credit Agreement with Athyrium, which depends in part on its ability to obtain regulatory approval of IV meloxicam by December 31, 2018. The company may raise such additional funds through debt refinancing, bank or other loans, through strategic research and development, licensing, including out-licensing activities, and/or marketing arrangements or through public or private sales of equity or debt securities from time to time. Financing may not be available on acceptable terms, or at all, and its failure to raise capital when needed could materially adversely impact its growth plans and its financial condition or results of operations. Additional debt or equity financing, if available, may be dilutive to the holders of its common stock and may involve significant cash payment obligations and covenants that restrict its ability to operate its business or access to capital.

On March 7, 2015, in connection with the Gainesville Transaction, Recro Pharma ,through a wholly owned subsidiary, entered into a credit agreement with OrbiMed. Pursuant to the credit agreement, OrbiMed provided it with a term loan in the original principal amount of $50.0 million on April 10, 2015, which amount was used to fund the Gainesville Transaction. On November 17, 2017, the company entered into its credit agreement with Athyrium, pursuant to which the company drew $60.0 million in an initial term loan and have the ability to draw upon two additional tranches of terms loans, each in the aggregate original principal amount of $20.0 million. Pursuant to the terms of the credit agreement, the company may draw upon the second $20.0 million tranche on or before December 31, 2018, provided that the company receive regulatory approval for IV meloxicam and retain at least $20.0 million in unrestricted cash following payment of the $45.0 million milestone payment to Alkermes. The company may draw upon the final $20.0 million tranche on or prior to March 31, 2020, provided that Recro Pharma has drawn on the second tranche and have achieved net sales for IV meloxicam of $20.0 million in the most recent trailing twelve-month period. The company used the proceeds from the $60.0 million initial term loan to (i) repay in full all outstanding indebtedness under its credit facility with OrbiMed of approximately $31.7 million, which included the remaining debt principal balance of $27.3 million and early termination charges of $4.4 million and (ii) pay transaction fees associated with the credit facility with Athyrium of approximately $4.2 million. As of June 30, 2018, the company had $60.0 million outstanding principal under its Credit Agreement with Athyrium.

NMB Related License Agreement

In June 2017, the Company acquired the exclusive global rights to two novel neuromuscular blocking agents, or NMBs, and a proprietary reversal agent from Cornell University, or Cornell. The NMBs and reversal agent are referred to herein as the NMB Related Compounds. The NMB Related Compounds include one novel intermediate-acting NMB that has initiated Phase I clinical trials and two other agents, a novel short-acting NMB, and a rapid-acting reversal agent specific to these NMBs.

The transaction was accounted for as an asset acquisition, with the total cost of the acquisition of $766 allocated to acquired IPR&D. The Company recorded an upfront payment obligation of $350, as well as operational liabilities and acquisition-related costs of $416, primarily consisting of reimbursement to Cornell for specified past patent, legal and pre-clinical costs.

In addition, the Company is obligated to make: (i) an annual license maintenance fee payment until the first commercial sale of the NMB Related Compounds; and (ii) milestone payments upon the achievement of certain milestones, up to a maximum, for each NMB, of $5,000 for U.S. regulatory approval and commercialization milestones and $3,000 for European regulatory approval and commercialization milestones. The Company is also obligated to pay Cornell royalties on net sales of the NMB Related Compounds at a rate ranging from low to mid-single digits, depending on the applicable NMB Related Compounds and whether there is a valid patent claim in the applicable country, subject to an annual minimum royalty amount. Further, the Company will reimburse Cornell ongoing patent costs related to prosecution and maintenance of the patents related to the Cornell patents for the NMB Related Compounds.

The Company accounted for the transaction as an asset acquisition based on an evaluation of the accounting guidance (ASC Topic 805) and considered the early clinical stage of the novel and unproven NMB Related Compounds. The Company concluded that the acquired IPR&D of Cornell did not constitute a business as defined under ASC 805 due to the incomplete nature of the inputs and the absence of processes from a market participant perspective. Substantial additional research and development will be required to develop any NMB Related Compounds into a commercially viable drug candidate, including completion of pre-clinical testing and clinical trials, and, if such clinical trials are successful, application for regulatory approvals and manufacturing repeatability and scale-up. There is risk that a marketable compound may not be well tolerated and may never be approved.

Acquired IPR&D in the asset acquisition was accounted for in accordance with FASB ASC Topic 730, “Research and Development.” At the date of acquisition, the Company determined that the development of the projects underway at Cornell had not yet reached technological feasibility and that the research in process had no alternative future uses. Accordingly, the acquired IPR&D was charged to expense in the Consolidated Statements of Operations and Comprehensive Loss on the acquisition date. The acquired IPR&D charge is expected to be deductible over a 15-year period for income tax purposes.

Long-Term Debt

On November 17, 2017, the Company entered into a $100,000 Credit Agreement, or the Credit Agreement, with Athyrium Opportunities III Acquisition LP, or Athyrium. The Credit Agreement provides for an initial term loan in the original principal amount of $60,000 funded at closing. Pursuant to the terms of the Credit Agreement, there are two additional tranches of term loans, each in an aggregate original principal amount of $20,000. The second tranche term loan may be drawn upon on or before December 31, 2018 provided that the Company receives regulatory approval of the Company’s IV meloxicam product candidate and will have at least $20,000 in unrestricted cash after payment of the milestone payment due to Alkermes. The third tranche term loan may be drawn upon at any time on or prior to March 31, 2020 provided that the second term loan has been drawn upon and net sales of IV meloxicam achieve $20,000 for the most recent trailing twelve-month period. The maturity date of the Credit Agreement is November 17, 2022, the five-year anniversary of the closing.

The Term Loans will bear interest at a rate equal to the three-month LIBOR rate, with a 1% floor plus 9.75% per annum, with quarterly, interest-only payments until the maturity date. The unpaid principal amount of the Term Loans is due and payable on the maturity date. In addition, in accordance with the Credit Agreement the Company will have to pay a 1% exit fee of $600, which will be accreted to the carrying amount of the debt using the effective interest method over the term of the loan. In addition, if there is an early repayment, there is a sliding scale of prepayment penalties.

The Credit Agreement contains certain usual and customary affirmative and negative covenants, as well as financial covenants that the Company will need to satisfy on a monthly and quarterly basis. As of June 30, 2018, the Company was in compliance with the covenants.

As of June 30, 2018, the remaining payments due under the Credit Agreement include a principal payment of $60,000 and an exit fee of $600 due at the maturity date.

In connection with the Credit Agreement, the Company issued warrants to each of Athyrium and its affiliate, Athyrium Opportunities II Acquisition LP, or Athyrium II, to purchase an aggregate of 348,664 shares of the Company’s common stock with an exercise price of $8.6043 per share. See Note 14(d) for additional information. The warrants are exercisable through November 17, 2024. The initial fair value of the warrant of $2,143 was recorded as a debt issuance cost.

In addition, the Company recorded debt issuance costs for the Credit Agreement of $4,439, which, along with the fair value of warrants, are being amortized using the effective interest method over the term of the Credit Agreement. Debt issuance cost amortization is included in interest expense within the Consolidated Statements of Operations and Comprehensive Loss. As of June 30, 2018, the effective interest rate was 15.74%, which takes into consideration the non-cash accretion of the exit fee and the amortization of the debt issuance cost.


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