Quick Update: Recro Pharma - $REPH

Well well well....

I posted about Recro here (less than 2 months ago).

Shares are down another 40% since then. Hope you didn't purchase shares after I posted about them. It is now down 70% since I bought shares.

Q2 Summary

• Revenue was down 50% due to lower sales and royalties.

  • One key customer had substantially less market share than last year - this was communicated in Q1. Largest revenue impact is from Verapamil as Mylan has re-entered the market. This accounted for about 2/3 of the decline.

  • Despite my initial thought, their products are affected by covid more than I thought. Some of their main products are used to treat ADHD and since there was little/no in school education, there was less demand for the product.

  • New business development was slowed due to lockdowns.

• Lower volumes led to lower cost absorption.

  • Gross margin was 25% vs. usually having 40%+ gross margins.

  • Negative EBIT of 1 mil.

• Market cap is now 68mil with an EV of 161mil.

• Started Clinical Trials Materials (CTM) Services and secured multiple contracts.

  • This is in response to covid's impact on new trials starting. It helps them leverage their logistical strength and experience to serve the customer.

• Filed a prospectus

  • To sell up to 30mil in common to Aspire Capital at $4.40 (share price is around $2.90 now)

  • To sell up to 100mil in common, preferred, debt, warrants, or rights

My Thoughts

The most concerning thing for me in the last two quarters was the drop in gross margins without any progress on the milestones I had mentioned in the previous post. It shows that they can't pivot their production costs quickly and are subject to market forces rather than having some power over them.

I am giving them a pass on the quarter. They lockdowns came fast and there are things that they could not have avoided. I do think the launch of CTM is a demonstration of them trying to navigate the lower activity environment. They still have a business that has high barriers to entry with products that will be in demand for the foreseeable future.

I have updated my milestones to include the CTM part of the business. The milestones are demonstrable items that will help build conviction in the stock.

New Milestones

• Refinance high cost debt

• Signs of significant growth in new products

• New CEO with focus on capital allocation

• Update guidance for 2020

• Progress on the CTM

Am I the only one who owns this thing?

Thanks,

Dean

*the author is long shares in REPH at time of writing. I have not bought or sold any shares since my original purchase.