Repligen Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; compared with the three months ended March 31, 2012. Unaudited consolidated financial statements. Repligen develops and sells bioprocessing products and also receives royalties and research-related revenue.
Financial results
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $16.46 million | $12.82 million | +28% |
| Product revenue | $11.93 million | $9.34 million | +28% |
| Royalty and other revenue | $4.52 million | $3.48 million | +30% |
| Operating income | $3.54 million | $1.17 million | +204% |
| Net income | $2.34 million | $1.23 million | +91% |
| Diluted EPS | $0.07 | $0.04 | — |
| Operating cash flow | $3.59 million | $1.73 million | +107% |
- Operating margin was approximately 21.5%, versus 9.1%. Gross profit after product and royalty costs was $8.98 million, or approximately 54.6% of revenue, versus $7.09 million, or 55.3%.
- Product costs rose 31%, faster than product revenue, reflecting higher sales, product mix, manufacturing variances and higher-cost Swedish inventory. Management said Swedish facility efficiencies were expected to improve gross margin during the rest of 2013.
- Research and development expense fell 22% to $2.18 million, primarily because prior-year RG1068 and Friedreich’s ataxia costs were higher. SG&A declined 4% to $3.31 million.
- The tax provision rose to $1.28 million from $59,000; the Q1 2013 effective rate was 35.45%, including approximately $298,000 of discrete items. Net income comparisons therefore also reflect a substantially higher tax charge.
- Comprehensive income was $2.08 million, down from $2.31 million, largely reflecting a $257,000 foreign-currency translation loss versus a $1.08 million gain in the prior-year quarter.
Cash, liquidity and obligations
- At March 31, 2013, cash and cash equivalents were $28.57 million; current and long-term marketable securities totaled $25.49 million. Together, cash and marketable securities were $54.06 million, compared with $49.97 million at December 31, 2012. Restricted cash of $200,000 is additional and not included in that total.
- Working capital was $61.80 million, up from $55.46 million at year-end. Current assets were $70.70 million and current liabilities $8.89 million. The balance sheet reports no borrowings or other debt.
- Operating activities provided $3.59 million. Investing activities used $5.05 million, mainly net purchases of marketable securities and $322,000 of capital expenditures. Stock-option exercises provided $957,000; cash declined $640,000 to $28.57 million.
- Fixed obligations and commitments totaled $21.50 million, including $15.58 million of operating leases, $4.41 million of purchase obligations and $1.51 million of contingent consideration. The company reported no off-balance-sheet financing arrangements.
Material changes and business developments
- Bioprocessing product revenue growth was attributed mainly to increased orders from key customers. Revenue concentration remained substantial: three bioprocessing customers accounted for 38%, 12% and 15% of total revenue, respectively; Bristol-Myers Squibb’s Orencia royalties were another 24%.
- Orencia royalty revenue increased to $3.85 million from $3.08 million. The royalty arrangement ends for sales after December 31, 2013; Repligen remits 15% of these royalties to the University of Michigan.
- Under the Pfizer SMA license, Repligen received a $5 million upfront payment in January 2013. It recognized $55,000 of related revenue in Q1 and expected to recognize the remaining $69,000 in Q2 as services were completed. The agreement provides for up to $65 million in potential future milestones and royalties, subject to conditions and potential third-party obligations; these amounts are not assured.
- Repligen completed the second cohort of the RG3039 Phase I trial and expected to finish transition activities to Pfizer in the first half of 2013. For RG1068, after an FDA complete response letter in 2012, the company was discussing an additional registration study. It completed patient dosing in an RG2833 Phase I study and was analyzing results.
- Contingent consideration declined, including payments associated with Novozymes and BioFlash. The company paid a €1 million Novozymes milestone in March 2013; remaining contingent consideration was reported at $1.51 million. Q1 included a $54,000 gain from fair-value adjustments.
Outlook, risks and other notable items
- No formal revenue or EPS guidance was provided. Management expected 2013 operating expenses to decline as therapeutic-development spending is reduced, and expected R&D expense in each remaining 2013 quarter to be below Q1. It also expected SG&A to be moderately lower and anticipated improved gross margins from manufacturing efficiencies.
- Management believed existing cash balances were adequate for at least 24 months, absent acquisitions of additional products, candidates or intellectual property. Future financing could be needed for strategic acquisitions or other investments and could dilute shareholders.
- Management identified the 2013 expiration of Bristol royalties as a funding and revenue risk. Product sales may fluctuate with customer order timing, development activity and regulatory approvals. Other cited risks include customer and supplier relationships, successful integration of the Swedish business, manufacturing performance, clinical and regulatory outcomes, partnerships, competition, currency movements and access to financing.
- Repligen did not hedge its foreign-exchange exposure. A hypothetical 100-basis-point decrease in interest rates was estimated to reduce investment fair value by approximately $196,000. Management reported no material legal proceedings known to it and said disclosure controls were effective; no material change in internal control over financial reporting was reported.
- The company had approximately $44.68 million of federal net operating loss carryforwards and $2.16 million of business tax credits, subject to expiration and possible ownership-change limitations. It reversed a further $767,000 of deferred-tax valuation allowance in Q1.
Important facts for investors to verify
- Whether bioprocessing growth and margins persist, especially given customer concentration and order-driven quarterly variability.
- Actual Orencia royalties through their December 31, 2013 expiration and the resulting impact on revenue and cash generation.
- Progress and economics of the Pfizer license, including completion of transition services and whether contingent milestones or royalties are achieved.
- Evidence that Swedish manufacturing efficiencies improve product margins, and whether integration or production issues arise.
- Cash-flow sustainability, commitments and any future financing or acquisition plans; management’s 24-month liquidity view excludes certain potential strategic investments.
- Development and regulatory progress for RG1068 and RG2833, including the cost and partner support for any further trials.