REPH Reports Disappointing Guidance, Move to HOLD
This morning, Recro Pharma (REPH) reported Q1 2020 revenue of $21.8 million, ahead of consensus expectations of $19.4 million.
Unfortunately, management decreased annual revenue guidance to $80-85 million, down from original guidance of $98-100 million. 2020 EBITDA guidance decreased to $26-30 million from $42 million.
The reduction in guidance is a result of the following:
1) Increased competition from Mylan, a competitor to Recro customer, Teva.
a) Recro manufactures a product called Verapamil for Teva. In 2019, Verapamil demand was very strong as Mylan, who also manufactured the product, was out of the market due to quality control issues at its plant. However, Mylan has regained ~50% market share faster than anticipated in 2020.
2) Slower than expected new business growth, which REPH believes is primarily attributable to COVID-19.
a) Management had previously anticipated that new business activity would offset headwinds from Mylan coming back into the market. However, COVID-19 has slowed customer access and resulted in some customers and prospects pulling back due to concerns about availability of development funding, timing of clinical trials, etc.
3) Notifications by two customers of discontinuations for two commercial product lines, which resulted in a decrease of approximately $4 million on previous 2020 revenue guidance and is estimated to have an annual impact to 2021 revenue of approximately $7 million to $8 million.
Due to the disappointing 2020 guidance, the stock has fallen to $5.07 and is trading at an EV/2020 EBITDA multiple of 7.8x.
This appears to me to be an over-reaction as the stock is trading at a trough valuation on trough earnings. A normalized valuation would be ~15x EBITDA and normalized EBITDA would be $50 million, significantly higher than current 2020 guidance. Looking out a few years, the stock should trade at a significantly higher price.
Given COVID-19 headwinds, I’m going to take down my price target down to 13.00 which corresponds to a 15.0x EV/2020 EBITDA multiple, a 25% discount to public peer Catalent.
While my price target still implies significant upside longer term, I believe REPH will be in “purgatory” for at least the next couple of quarters given COVID-19 headwinds.
As such, I’m changing my BUY rating to HOLD.