Repligen Corporation — Q1 2014 Form 10-Q
Business context and reporting period. The unaudited quarter ended March 31, 2014. Repligen develops, manufactures and sells bioprocessing products to life-sciences and biopharmaceutical customers. It is focusing on bioprocessing while pursuing partners for remaining therapeutic assets. Results are not necessarily indicative of the full year.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Total revenue | $16.33 million | $16.46 million; down 1% |
| Bioprocessing product revenue | $14.33 million | $11.93 million; up 20% |
| Royalty and other revenue | $1.99 million | $4.52 million; down 56% |
| Income from operations | $5.31 million; 32.5% of revenue | $3.54 million; 21.5% of revenue |
| Net income / diluted EPS | $4.28 million / $0.13 | $2.34 million / $0.07 |
| Operating cash flow | $8.00 million | $3.59 million |
| Cash and cash equivalents | $49.21 million at quarter-end | $39.83 million at December 31, 2013 |
| Cash plus marketable securities | $81.67 million | $73.84 million at December 31, 2013 |
- Product gross margin, calculated as product revenue less cost of product revenue, was approximately 55.8%, versus 42.2% a year earlier. Management attributed lower product costs to improved capacity utilization and manufacturing efficiencies, but cautioned that margins could decline during the rest of 2014 due to production volume, shipments and product mix.
- Working capital was $81.58 million, up from $75.05 million at December 31, 2013. Current liabilities were $7.12 million and current assets were $88.70 million. The balance sheet lists no borrowings; reported liabilities include accounts payable, accruals and other long-term liabilities.
- Cash from operations included a $6.73 million decrease in royalties and other receivables, alongside a $4.00 million reduction in accrued liabilities. Capital expenditures were $0.60 million. Cash and cash equivalents increased by $9.38 million during the quarter.
Material changes versus the prior comparable period
- Product revenue grew 20%, primarily from increased orders by key bioprocessing customers. However, total revenue was slightly lower because Bristol-Myers Squibb’s Orencia royalties ended after December 31, 2013: those royalties contributed $3.85 million in Q1 2013 and none in Q1 2014.
- Q1 2014 included $2.00 million of revenue from the upfront payment for the sale of Repligen’s HDAC inhibitor portfolio to BioMarin. Repligen may receive up to $160 million in future development, regulatory and commercial milestones, plus royalties; these amounts are contingent and were not recognized as current revenue.
- Research and development expense declined 45% to $1.20 million, reflecting the shift away from therapeutic drug development, partly offset by bioprocessing R&D. Selling, general and administrative expense rose 2% to $3.38 million.
- Income tax expense was $1.12 million, an effective rate of 20.8%, compared with $1.28 million and 35.45% in Q1 2013. The filing attributes the difference primarily to the lower Swedish tax rate and prior-year discrete tax items.
Outlook, risks and unusual items
- Management expects bioprocessing revenue to be the primary source of revenue for the foreseeable future. It expects quarterly product-sales fluctuations, similar bioprocessing R&D spending for the remaining 2014 quarters, and moderately higher SG&A as customer-facing activities expand.
- Management believes existing cash balances are adequate for at least 24 months absent acquisitions, while noting that acquisitions, business expansion and other needs could require financing. Additional equity financing could dilute shareholders; financing may not be available on favorable terms.
- In March 2014, Repligen amended its Waltham lease to add 19,900 square feet for an eight-year, one-month term beginning no earlier than August 1, 2014. The expansion adds approximately $361,000 in annualized rent and requires an additional $250,000 security deposit. Total contractual obligations reported were $22.70 million, including $16.45 million in operating leases.
- Revenue concentration is significant: three bioprocessing customers represented 40%, 22% and 14% of Q1 2014 revenue, respectively. Management also identifies order timing, customer development activity, regulatory approvals, market acceptance, competition, manufacturing capabilities and foreign-exchange movements as risks. The company does not hedge foreign-exchange exposure.
- Potential BioMarin milestones and royalties, and up to $64 million in potential future Pfizer payments under the SMA license, depend on specified events and are not assured. The RG1068 program has received an FDA complete response letter requiring additional clinical data; management expects any further development to be supported by sponsors or third parties.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no legal proceedings believed likely to have a material adverse effect.
Important facts for investors to verify
- How much of future growth can bioprocessing product sales sustain, given key-customer concentration and quarterly order variability?
- What is the expected timing and probability of BioMarin milestones and royalties, and what further obligations, if any, remain under the agreement?
- How will the loss of Orencia royalties affect earnings and cash generation, and can product growth offset that revenue over time?
- What explains the composition and sustainability of operating cash flow, particularly the receivables collection and reduction in accrued liabilities?
- How will the expanded lease, planned investment and any acquisitions affect cash requirements, and would additional financing or share issuance be needed?