William Blair initiated research coverage of Recro Pharma, Inc. (REPH $1.90), a small-molecule finished-dose contract development and manufacturing organization (CDMO).

Analyst John Kreger estimated the company would generate adjusted EBITDA of $16.9 million in 2021 and $18.6 million in 2022. He believes organic revenue growth can reach 7% next year and improve to 9% longer term.

Kreger said, “Recro Pharma has taken recent encouraging steps to turn the business into an attractive stand-alone small-molecule CDMO. Before Recro became an independent entity in 2015, it was a small CDMO division of a much larger Irish biotech innovator. During this time, the primary growth driver was revenue from commercial customer contracts for a handful of off-patent drugs, and there was minimal investment in the segment’s development. Over the last couple of years, however, the company has begun a transformation; it has spun off its struggling acute-care business, updated its leadership, improved its client and functional diversity, and strengthened its balance sheet. The turnaround process will take time given the long-cycle nature of the business, but we are optimistic that it should succeed. We estimate the CDMO market size is $50 billion today and growing in the midsingle digits. The small-molecule finished-dose portion of this market where Recro currently focuses is $13.5 billion, by our estimates. Growth in large pharma R&D budgets, an increasing pipeline driven by small biotech, and recent success of new modalities should offer a healthy base of demand for CDMOs.”

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