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Recro Pharma, Inc. - Initiation Note

Progenics Pharmaceuticals, Inc.

BUY (REPH, $7.14)

Expecting Additional Phase 3 Validation for Meloxicam IV by YE16 – Manufacturing Business Provides Valuation Floor: Initiating BUY/$22 TP

November 9, 2016

Jonathan Aschoff, Ph.D.

212.417.8277

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  • We are initiating coverage of Recro Pharma, Inc. with a Buy rating and a 1-year target price of $22, which is supported by a DCF analysis with a 5% discount rate and a 8 multiple of the terminal value for the projected 2020 EBITDA of $48 million. We view Recro’s late stage meloxicam IV program as highly de-risked, representing considerable upside to its present value. Current cash of $24.5 million should fund the company into 1H17.
  • The key near term investment catalyst for Recro is the 4Q16 release of results from the second Phase 3 meloxicam IV trial. Meloxicam IV is Recro’s leading drug, currently in Phase 3 for post-operative pain following abdominoplasty and already successful in Phase 3 for post-operative pain following bunionectomy. Meloxicam has been dosed orally for many years to control pain in rheumatoid arthritis and osteoarthritis, and is therefore known to be effective for pain control. In the postoperative pain setting, Recro’s meloxicam IV has the advantage of being formulated with long acting NanoCrystal technology, allowing for a convenient once daily dosing given its extended ability to control pain.
  • Meloxicam IV is capable of delivering peak US revenue of about $200 million, by our estimate. We estimate submission of the meloxicam IV NDA in mid-2017, and FDA approval in mid-2018. We believe that a 100 rep salesforce would be required to effectively penetrate the desired number of surgical centers. Recro will generate data with meloxicam IV versus standard of care, to be available after approval, as well as price the drug comparably to competitor Ofirmev, so as to facilitate uptake among hospital formularies, a price sensitive market.
  • We believe that Recro’s contract manufacturing facility will continue to throw off excess cash, with 2016 revenue projected to be $60 million. The 97,000 square foot cGMP facility manufactures a mix of proprietary and generic drugs for its clients, mostly extended release formulations, and is compensated via product sales, royalties and profit sharing. From excess cash flow alone, Recro has been able to pay off almost half of the $50 million it borrowed to pay for the facility, which it acquired in 2Q15 from Alkermes (ALKS – $53.85) along with meloxicam IV. The facility provides service capabilities, process development, optimization, process scale-up, clinical supply and validation, and commercial supply.

REPH


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