Repligen Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods. Repligen develops and sells bioprocessing products for life-sciences and biopharmaceutical manufacturing, alongside royalty, licensing, and sponsored-research revenue. The company reports one operating segment.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $18.82m | $15.10m | $52.79m | $43.45m |
| Product revenue | $12.18m | $11.12m | $37.13m | $32.13m |
| Royalty and other revenue | $6.64m | $3.98m | $15.65m | $11.33m |
| Income from operations | $8.04m | $2.19m | $17.69m | $4.67m |
| Net income | $5.89m | $1.81m | $12.77m | $4.60m |
| Diluted EPS | $0.18 | $0.06 | $0.40 | $0.15 |
- Revenue increased 25% in Q3 and 21% year to date. Product revenue rose 10% and 16%, respectively; management attributed the growth primarily to higher orders from key bioprocessing customers.
- Operating margin was approximately 42.7% in Q3 and 33.5% for the nine months, versus 14.5% and 10.8% in the comparable 2012 periods. Product gross margin was approximately 53.5% in Q3 and 51.9% year to date.
- Operating cash flow was $18.59m for the first nine months, compared with $6.21m in 2012. Investing activities used $7.88m, including $3.77m of property and equipment purchases; financing activities provided $2.24m from option exercises.
- Cash and cash equivalents were $42.24m; marketable securities totaled $24.86m, for combined cash and securities of $67.11m. Working capital was $78.66m. Current liabilities were $8.78m; no debt is reported in the presented balance sheet.
- Total assets were $111.64m and stockholders’ equity was $100.16m at September 30, 2013. Cash and securities were $49.97m at December 31, 2012.
Material changes and business developments
- Nine-month R&D expense declined 27% to $5.92m, mainly from reduced therapeutic-program spending, while bioprocessing R&D increased. SG&A fell 6% to $9.33m; product costs fell 6% to $17.85m, reflecting operational efficiencies.
- Orencia royalties from Bristol-Myers Squibb were $4.83m in Q3 and $12.96m year to date. These represented 26% of Q3 revenue and 25% of nine-month revenue. The royalty agreement ends December 31, 2013, after which Repligen expects no further payments.
- Under its Pfizer SMA license, Repligen recognized $1.09m in Q3 and $1.22m year to date, including a $1.0m clinical milestone. The company states it completed all clinical obligations under the agreement by September 30, 2013. Up to $64m of potential future milestones and royalties may be payable to Repligen, subject to agreement terms and potential third-party obligations.
- Revenue remains concentrated: three bioprocessing customers contributed 28%, 10%, and 20% of Q3 revenue. Product-order timing and customer development activity can cause quarterly fluctuations.
Outlook, risks, and contingencies
- Management expects the loss of Bristol royalties after year-end to materially and adversely affect revenue and operating results. It says available cash is adequate for at least 24 months, absent acquisitions, and that the company may need to use cash to fund operations if replacement revenue is not secured.
- Management expects 2013 operating expenses to decrease as therapeutic-drug development spending is reduced and manufacturing efficiency improves. It expects fourth-quarter R&D and SG&A at levels similar to Q3 and warns gross margins may decline slightly due to production volume, product mix, and sales of higher-cost inventory produced in 2012. No specific revenue or earnings guidance is provided.
- The strategy prioritizes bioprocessing growth and product development; therapeutic programs are largely dependent on external partners or funding. RG2833 work was affected by potentially toxic metabolites observed in a study, while RG1068 requires additional clinical data following an FDA complete response letter.
- A Massachusetts tax audit concerns apportionment of license income and research-credit recoverability. No reserve was recorded; after unsuccessful mediation, the company anticipated an assessment and planned to appeal. Estimated exposure, including penalties but excluding interest, is approximately $2.5m if unsuccessful.
- Other risks include customer and supplier concentration, foreign-exchange exposure (not hedged), market and interest-rate risk, and execution/integration risks. A hypothetical 100-basis-point interest-rate decline would reduce investment fair value by about $155,000. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- How much bioprocessing growth and profitability can offset the scheduled end of Bristol royalties, and whether replacement revenue is achieved.
- Customer concentration, order volatility, and the sustainability of recent product margins and operational efficiencies.
- Timing, conditions, and potential third-party offsets for Pfizer milestones and any future royalty income.
- Resolution and final exposure in the Massachusetts tax audit, including any interest not included in the stated estimate.
- Capital spending, acquisition plans, and whether the stated cash runway remains adequate under the post-royalty operating profile.