Repligen Corporation — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; filed August 7, 2013. Repligen develops and sells bioprocessing products, including Protein A, growth factors and chromatography columns. It also earned royalties on Bristol-Myers Squibb’s U.S. Orencia sales and retained partnered therapeutic programs.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $17.51 million | $15.52 million | $33.96 million | $28.35 million |
| Operating income | $6.10 million | $1.32 million | $9.65 million | $2.48 million |
| Net income | $4.54 million | $1.57 million | $6.88 million | $2.80 million |
| Diluted EPS | $0.14 | $0.05 | $0.21 | $0.09 |
| Operating cash flow | Not separately presented | Not separately presented | $12.39 million | $3.74 million |
- Q2 revenue increased 13% year over year: product revenue rose 12% to $13.01 million and royalty and other revenue rose 16% to $4.50 million. For the first half, revenue increased 20%, with product revenue up 19% and royalty and other revenue up 23%.
- Calculated from reported figures, Q2 operating margin was approximately 34.9%, compared with 8.5% a year earlier; first-half operating margin was approximately 28.4%, compared with 8.8%.
- At June 30, cash and cash equivalents were $37.33 million and marketable securities totaled $25.46 million, or $62.79 million combined. Working capital was $70.70 million. Current assets were $80.91 million versus current liabilities of $10.22 million.
- Total liabilities were $12.20 million; the balance sheet presents no debt line item. First-half capital spending was $1.11 million. Cash increased $8.12 million during the first half.
Changes and key drivers
- Higher orders from key bioprocessing customers drove product revenue growth. Management cautioned that order timing, customer development activity and regulatory approvals can cause significant quarterly fluctuations.
- Q2 cost of product revenue fell 28%, which management attributed primarily to operational efficiencies at Repligen Sweden; lower costs contributed to stronger operating results. Management cautioned that margins could soften in the second half due to production volume, product mix and sales of higher-cost inventory produced in 2012.
- Research and development expense fell 21% in both Q2 and the first half, primarily reflecting reduced therapeutic-program spending, partly offset by increased bioprocessing R&D. SG&A declined 9% in Q2 and 6% for the first half.
- First-half income tax provision was $2.78 million, versus $0.27 million in 2012. The 2013 provision reflected an expected 25.69% annual effective tax rate plus approximately $298,000 of discrete items recognized in Q1.
- Foreign-currency translation reduced comprehensive income by $1.14 million in the first half. Q2 other expense was $122,000, compared with $458,000 of other income in the prior-year quarter, primarily reflecting currency movements related to Sweden.
Outlook, risks and unusual items
- Orencia royalties: Royalties from Bristol represented 25% of Q2 revenue and 24% of first-half revenue. The agreement ends December 31, 2013; management warned that the loss of these royalties will materially and adversely affect revenue and operating results. Repligen remits 15% of those royalties to the University of Michigan.
- Management outlook: Repligen expected lower R&D expense in the second half, similar quarterly SG&A to Q2, and continued investment in bioprocessing. Management believed existing cash was sufficient for at least 24 months, absent acquisitions, and expected 2013 operating expenses to decline as therapeutic development spending fell and manufacturing efficiencies improved.
- Pfizer agreement: Repligen received a $5 million upfront payment in January 2013 and recognized $124,000 of related revenue in the first half as services were performed. It may receive all or part of a $2 million clinical milestone in 2013, depending on Pfizer’s development path; up to $65 million in total future milestones and royalties are potential, not assured.
- Therapeutic programs: Pfizer assumed most future SMA development costs; Repligen substantially completed its remaining transition obligations in Q2. For RG1068, the FDA had issued a complete response letter requiring additional clinical data. RG2833 trial dosing was completed, but potentially toxic metabolites were observed; the company was seeking partners for further development.
- Concentration and operating risks: Q2 revenue included 39% from one bioprocessing customer, 25% from Orencia royalties, 15% from another bioprocessing customer and 10% from a third. Product demand, customer concentration, foreign exchange exposure (not hedged), inventory estimates, and the ability to replace Orencia royalties are significant considerations. Management reported no material legal proceedings known to it and no material change in internal control over financial reporting.
- Commitments: Contractual obligations totaled $21.58 million, including $14.31 million of operating leases, $5.74 million of purchase obligations and $1.54 million of contingent consideration. No off-balance-sheet financing arrangements were reported.
Important facts for investors to verify
- How much bioprocessing growth and margin improvement can persist after the Orencia royalty agreement expires at year-end 2013?
- What replacement revenue, cost reductions or partnership proceeds are achievable, and what are the timing and conditions for Pfizer milestones?
- Are reported customer orders, customer concentration and inventory levels sustainable, particularly given management’s warning about quarterly volatility and possible second-half margin pressure?
- What additional clinical, regulatory and funding requirements apply to RG1068 and RG2833, and will external partners fund further development?
- How do currency movements, tax assumptions and the listed lease, purchase and contingent-payment commitments affect future cash generation and liquidity?