Repligen Corporation — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Repligen develops and sells bioprocessing products for biologic drug manufacturing. Unless noted otherwise, amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $36.6 million | $24.7 million | $99.6 million | $78.9 million |
| Gross margin | 45.4% | 54.4% | 51.9% | 55.7% |
| Operating income (loss) | $(0.4) million | $3.7 million | $10.7 million | $13.1 million |
| Net income | $4.7 million | $1.2 million | $16.2 million | $6.7 million |
| Diluted earnings per share | $0.11 | $0.03 | $0.43 | $0.20 |
Revenue grew 48.2% in Q3 and 26.2% in the nine-month period. Management attributed growth to stronger XCell ATF and OPUS orders and contributions from acquisitions. Q3 gross margin fell as product costs rose faster than revenue, with mix and acquisition-related inventory step-up charges also affecting results. Q3 operating results included $3.4 million of acquisition and integration costs, $2.7 million of inventory step-up charges, and $2.0 million of intangible amortization. The tax benefit materially lifted reported net income: Q3 included a $6.6 million valuation-allowance release, while the nine-month period included $12.2 million of such releases. Adjusted net income, a non-GAAP measure, was $6.6 million for Q3 and $18.5 million for nine months; adjusted EBITDA was $8.7 million and $25.5 million, respectively.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $2.2 million, versus $5.6 million a year earlier. Capital expenditures were $3.7 million; operating cash flow less capital expenditures was approximately negative $1.5 million.
- Cash and cash equivalents were $159.7 million at September 30, 2017, with no marketable securities. Working capital was $112.7 million, down from $163.1 million at year-end 2016, partly because the notes were reclassified as current.
- The company had $115 million principal amount of 2.125% convertible senior notes due 2021, carried at $98.2 million net of discount and issuance costs. The notes became convertible at holders’ option in Q4 2017; none had converted as of the filing. Repligen said it intended to settle principal in cash and any conversion premium in shares.
- Cash increased $37.4 million over the nine months. The company raised $129.3 million net in a July common-stock offering and paid approximately $122.9 million in cash for Spectrum.
Material changes and acquisitions
On August 1, 2017, Repligen acquired Spectrum LifeSciences for approximately $371.5 million: $122.9 million cash, 6.15 million shares valued at $247.6 million, and a working-capital adjustment. Spectrum contributed $7.6 million of revenue from acquisition through quarter-end and approximately $2.0 million of quarterly net loss. Its purchase-price allocation was preliminary and included $265.1 million of goodwill, which the company said was not expected to be tax deductible. The acquisition expanded Repligen’s filtration products, including hollow-fiber TFF systems and consumables.
Balance-sheet changes also reflect the acquisition: goodwill rose to $326.7 million from $59.5 million at year-end, and intangible assets rose to $147.4 million from $29.8 million. Shares outstanding increased, including shares issued for Spectrum and the public offering.
Outlook, risks and unusual items
- No numerical revenue or earnings guidance is provided. Management expects operating expenses to increase as it integrates Spectrum, expands product lines and grows commercial capabilities; it also noted gross margins could fluctuate with production volume and mix.
- Management said existing cash was adequate for at least 12 months from the filing date, absent additional acquisitions, even if all notes converted in Q4 2017. Future financing needs could arise from acquisitions, investment or debt repayment; additional equity could dilute shareholders, and financing may not be available on favorable terms.
- Demand and quarterly sales can fluctuate with customer orders, drug-development activity and regulatory approvals. GE Healthcare and MilliporeSigma represented 24% and 18% of nine-month revenue, respectively. Repligen also identified reliance on commercial and supply relationships, competition, manufacturing capacity, product acceptance, acquisition integration, intellectual property and foreign-exchange exposure as risks. It did not hedge its principal currency exposures.
- The Spectrum purchase accounting remained preliminary. The company excluded Spectrum from the scope of its internal-control assessment for this quarter under the SEC guidance for recently acquired businesses; it reported disclosure controls as effective and no material changes to previously disclosed risk factors.
- The unusually high reported tax benefit reflects releases of deferred-tax-asset valuation allowances tied to an intellectual-property transfer and the Spectrum acquisition. These benefits are not a measure of recurring operating performance.
Important facts for investors to verify
- Whether Spectrum’s integration, acquired products and expected commercial benefits support future growth, and how the preliminary purchase-price allocation changes.
- Whether gross margins stabilize after acquisition-related inventory charges and amid the expected product-mix and production fluctuations.
- Whether noteholders convert in Q4 2017 and the resulting cash use and share dilution under the company’s intended settlement approach.
- How recurring operating cash flow develops relative to earnings, working-capital needs and planned investment.
- How customer concentration and reliance on key commercial or supply relationships affect revenue, particularly if demand or customer ordering patterns change.