Repligen Corporation (RGEN) — Q2 2019 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2019; interim financial statements are unaudited. Repligen supplies technologies used in biopharmaceutical manufacturing. On May 31, it acquired C Technologies, adding process analytics instruments and consumables to its filtration, chromatography and protein businesses. Unless noted otherwise, financial amounts below are in U.S. dollars.
Financial performance and liquidity
- Q2 revenue: $70.7 million, up 48.1% from $47.7 million a year earlier. Product revenue was $70.7 million. Management attributed growth mainly to continued adoption, particularly of chromatography and filtration products; C Technologies contributed $2.2 million for the period it was owned.
- Q2 earnings: Operating income was $11.1 million versus $4.3 million; net income was $8.1 million versus $2.7 million. Diluted EPS was $0.17 versus $0.06.
- Q2 margins: Gross margin was 56.6%, compared with 58.2% excluding $1.2 million of acquired-inventory step-up amortization. Operating margin was approximately 15.6%, versus 9.0% in Q2 2018; net margin was approximately 11.4%, versus 5.7%.
- First-half results: Revenue was $131.3 million, up 41.9%; operating income was $22.2 million versus $10.2 million, and net income was $16.1 million versus $6.2 million. Diluted EPS was $0.34 versus $0.14. Gross margin was 56.2%, or 57.1% excluding acquired-inventory step-up amortization.
- Cash flow: Operating cash flow for the first half was $27.6 million, compared with $7.5 million. Investing used $191.3 million, chiefly reflecting $182.2 million net cash paid for C Technologies and $9.1 million of capital expenditures and software costs. Financing provided $190.2 million, including $189.6 million net proceeds from the May stock offering. Cash, cash equivalents and restricted cash ended at $217.8 million.
- Liquidity and debt: June 30 cash and cash equivalents were $208.9 million, with another $8.9 million restricted. Working capital was $175.6 million. The 2.125% convertible notes due 2021 had $115.0 million principal and $105.7 million carrying value, classified as current. The filing states available cash was expected to meet needs for at least 24 months, assuming no acquisitions of additional products, candidates or intellectual property.
- Balance sheet changes: Total assets increased to $1.07 billion from $774.6 million at year-end 2018, substantially reflecting C Technologies’ acquisition and related goodwill and intangibles. Goodwill was $469.5 million and intangible assets, net, were $220.5 million at June 30. Operating lease liabilities totaled $23.5 million.
Material changes versus the prior comparable period
- Revenue and earnings grew substantially year over year. Product revenue growth was primarily attributed to customer adoption; the acquisition contributed $2.2 million in the quarter and $1.5 million net loss from acquisition through June 30.
- Q2 selling, general and administrative expense rose 42.9% to $23.7 million, including $3.5 million of C Technologies transaction costs and increased commercial and administrative staffing. First-half R&D expense declined 2.4%, partly because of lower Navigo development investment than in the prior-year period.
- On May 3, Repligen issued 3.14 million shares at $64 per share, raising approximately $189.6 million net. Common shares outstanding were 48.1 million at June 30, compared with 43.9 million at December 31, 2018.
- The company adopted lease accounting standard ASC 842 on January 1, recognizing operating lease right-of-use assets and liabilities without restating comparative periods.
Outlook, risks and unusual items
- No quantified full-year revenue or earnings guidance is provided in the filing. Management expected R&D spending to increase slightly for the rest of 2019 and operating expenses to rise as the business and commercial capabilities expand. Sales can fluctuate with large production orders, customer development activity and regulatory approvals.
- The C Technologies purchase price was approximately $239.9 million, comprising cash and 779,221 shares; an additional $9 million is payable to employees subject to continued employment. The preliminary allocation included $142.9 million goodwill and $90.8 million identifiable intangibles and remained subject to valuation adjustments.
- After quarter-end, Repligen raised approximately $130.7 million net from a July stock offering and $278.4 million net from $287.5 million principal of 0.375% convertible notes due 2024. It used $92.3 million cash and issued 1,850,155 shares to exchange $92.0 million principal of the 2021 notes, and issued a redemption notice for remaining 2021 notes. These post-quarter transactions are not reflected in June 30 balances.
- Revenue concentration is notable: GE Healthcare and MilliporeSigma represented 16% and 13% of Q2 revenue, respectively. Management also cited acquisition integration, product demand, customer and partner relationships, competition, manufacturing capacity, regulatory and intellectual-property matters, foreign exchange and access to future financing among risks. The company did not hedge its foreign-currency exposure.
- Q2 included $3.5 million acquisition transaction costs and $1.2 million acquired-inventory step-up amortization. The company reported no legal proceedings believed likely to have a material adverse effect and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether reported growth persists excluding acquisition contributions and whether product demand and quarterly order timing remain favorable.
- Final C Technologies purchase-price allocation, integration performance, and whether expected synergies materialize.
- The effect of July’s equity and convertible-note offerings, note exchanges and redemption on dilution, cash and future interest expense.
- Customer concentration and the sustainability of gross margins, especially after acquisition-related inventory and intangible amortization.
- Working-capital needs, inventory growth, lease commitments and management’s liquidity assumptions if acquisition activity continues.