Recently, Recro Pharma (REPH) reported earnings and issued weak guidance for 2020. In 2019, REPH benefited as it manufactures a product called Verapamil for Teva Pharmaceutical Industries (TEVA), notes Rich Howe, editor of Stock Spin-Off Newsletter.

Verapamil is a calcium channel blocker; demand was very strong in 2019 as Mylan (MYL), who also manufactured the product, was out of the market due to quality control issues at its plant.

REPH expects Mylan to come back to market and as a result, expects some destocking from Teva. This will be a revenue headwind.

However, REPH also expects significant growth from its business development efforts which will offset the destocking. As a result, revenue and its contract developing and manufacturing organization (CDMO) segment EBITDA is expected to be roughly flat.

I think management is being very conservative with guidance. Historically, actual revenue has been 10% to 25% higher than initial guidance dating from 2016 to 2019. Further, REPH is trading at 7.2x ‘20 EBITDA and 13.9x ‘20 EPS.

Seems absurdly cheap for a high quality, defensive business in a consolidating industry where peers are being acquired for 16.0x EBITDA.

While guidance was indeed disappointing, my investment case for REPH is very much intact. I believe guidance is very conservative, and the long term outlook for the business remains healthy. I took advantage of the recent weakness and bought some more of REPH in the mid $10 range.

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