Repligen Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise indicated. The interim financial statements are unaudited.
Business context and financial performance
Repligen develops and sells technologies and systems used in biopharmaceutical manufacturing, including chromatography, filtration, process analytics and protein products. It reports one operating segment.
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $87.5 | $70.7 | $163.6 | $131.3 |
| Revenue growth | 23.7% | — | 24.5% | — |
| Gross margin | 57.9% | 56.6% reported | 57.9% | 56.2% reported |
| Income from operations | $19.5 | $11.1 | $31.4 | $22.2 |
| Operating margin | 22.3% | 15.6% | 19.2% | 16.9% |
| Net income | $15.9 | $8.1 | $25.7 | $16.1 |
| Diluted EPS | $0.30 | $0.17 | $0.48 | $0.34 |
Gross margins in 2019 were affected by acquisition-related inventory step-up amortization of $1.2 million; excluding it, the filing reports gross margins of 58.2% for Q2 2019 and 57.1% for the first half of 2019. The 2020 reported margin was therefore lower than Q2 2019 on that adjusted comparison, but higher than the adjusted first-half 2019 margin.
Cash flow, balance sheet and debt
- First-half operating cash flow was $26.3 million, versus $27.6 million in 2019. Capital expenditures were $7.3 million and capitalized software costs were $2.2 million. Investing activities used $9.5 million; financing activities provided $5.4 million.
- Cash and cash equivalents were $560.4 million at June 30, 2020, up from $528.4 million at year-end 2019. Working capital was $642.8 million, versus $593.5 million at year-end.
- Inventory increased to $69.9 million from $54.8 million at year-end; management said the increase supported future revenue. First-half inventory growth used $15.0 million of cash.
- The company had $287.5 million principal amount of 0.375% convertible notes due July 2024, carried at $238.2 million net of discount and issuance costs. The notes were not convertible at the holder’s option as of June 30. Their disclosed fair value was $364.0 million.
- Management stated that, absent acquisitions of additional products, candidates or intellectual property, existing cash was adequate for at least the next 24 months.
Material changes and management commentary
- Product revenue grew 23.7% in Q2 and 24.5% in the first half. Management attributed growth to continued customer adoption, particularly in chromatography and filtration, and to accelerated Q2 demand for protein and filtration products. C Technologies, acquired in May 2019, contributed $5.5 million of Q2 and $12.1 million of first-half year-over-year revenue increases; its reported revenue was $7.7 million in Q2 and $14.3 million in the first half of 2020.
- Management said demand included customers working on monoclonal antibodies, gene therapies, vaccines and therapeutics, including COVID-19-related programs. It expected direct sales to continue increasing through the remainder of 2020, particularly from COVID-19 customers scaling up and progressing candidates through clinical trials.
- Q2 SG&A rose 12.8% year over year; first-half SG&A rose 27.0%, reflecting C Technologies, commercial and administrative expansion, headcount and stock-based compensation. First-half R&D rose 2.1%; management expected R&D spending to increase in the rest of 2020 to support product development.
- COVID-19 had not materially affected reported results or operations through June 30, but management said future effects were uncertain. Remote work contributed to lower Q2 R&D spending. Added manufacturing costs included protective equipment for on-site personnel.
Outlook, risks and unusual items
- The filing provides no numerical revenue or earnings guidance. Management anticipated continued business investment and higher operating expenses, and cautioned that large production orders, customer development activity and regulatory approvals can cause quarterly revenue fluctuations.
- On July 13, 2020, after quarter-end, Repligen completed its acquisition of Engineered Molding Technology, a maker of single-use silicone assemblies and components. The purchase price allocation was to be reported later; the filing gives no purchase price.
- Repligen paid $9.0 million to C Technologies employees in Q2 under an acquisition-related continued-employment arrangement. Compensation expense recognized for this arrangement was $1.5 million in Q2 and $3.7 million in the first half.
- Customer concentration is material: Cytiva and MilliporeSigma each represented 12% of Q2 revenue; together they represented 24%. Management also cited risks from pandemic-related uncertainty, customer and supplier operations, competition, acquisitions and integration, reliance on key commercial relationships, and unhedged foreign currency exposure.
- The company reported no material changes to previously disclosed risk factors and no legal proceedings believed likely to have a material adverse effect. Disclosure controls were considered effective.
Most important facts for investors to verify
- Whether elevated bioprocessing demand, including COVID-19-related demand, persists and converts into sustained orders and revenue.
- How revenue growth, product mix and manufacturing capacity affect gross margins, particularly against the 2019 margin excluding the inventory step-up charge.
- Cash conversion and working-capital trends, especially inventory and receivables growth, alongside planned investment and acquisition spending.
- The EMT acquisition’s purchase price, integration costs and contribution, once disclosed, and the ongoing costs associated with acquisitions.
- Convertible-note terms and potential dilution if conversion conditions are met, as well as the extent of customer concentration and foreign-exchange risk.