Business context and reporting period
Repligen Corporation filed this unaudited Form 10-Q for the quarter ended September 30, 2015. The company develops and sells products used in biopharmaceutical manufacturing, including Protein A reagents, chromatography columns and the ATF System acquired from Refine Technology. It reports one operating segment. Unless otherwise noted, amounts below are in millions of dollars.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $19.814 | $15.278 | $62.088 | $47.155 |
| Operating income | $3.688 | $2.216 | $12.336 | $10.630 |
| Net income | $2.538 | $1.466 | $9.080 | $8.569 |
| Diluted EPS | $0.08 | $0.04 | $0.27 | $0.26 |
| Operating cash flow | Not presented quarterly | $11.701 | $16.648 |
- Q3 revenue rose 30% year over year, all from product sales; product revenue increased 31%. Nine-month revenue rose 32%, while product revenue increased 38%.
- Calculated product gross margin was approximately 57.4% in Q3 versus 54.3% a year earlier, and 59.6% for the first nine months versus 55.7%. Operating margin was approximately 18.6% in Q3 versus 14.5%, and 19.9% year to date versus 22.5%.
- Cash and cash equivalents were $48.084 million; marketable securities were $22.441 million, for combined cash and securities of $70.525 million at September 30, 2015, compared with $62.003 million at year-end 2014. Restricted cash of $0.450 million was additional.
- Working capital was $80.570 million, up from $70.263 million at December 31, 2014. The balance sheet reports no borrowings or other conventional debt; current liabilities were $15.709 million and other long-term liabilities were $2.693 million.
- Nine-month operating cash flow declined to $11.701 million from $16.648 million. Higher receivables used $2.767 million and higher inventory used $4.051 million. Investing activities provided $2.119 million, and financing activities provided $0.828 million.
Material changes versus the prior comparable period
- Growth reflected higher orders from key bioprocessing customers and, for the nine-month comparison, approximately $6.6 million of added revenue from the ATF System. A stronger U.S. dollar partly offset growth.
- Q3 selling, general and administrative expense increased 33% to $5.959 million; nine-month expense increased 50%. Management attributed the increase to expanded administrative infrastructure and customer-facing activities, as well as inventory-system implementation and training during the year.
- Nine-month contingent-consideration revaluation expense rose to $2.114 million from $0.126 million, primarily because of improved forecasts for Refine sales milestones. The liability was $4.819 million at September 30, including $4.454 million current.
- The prior-year nine-month comparison included $2.117 million of BioMarin royalty and other revenue; no such revenue was recorded in 2015. The 2014 period also benefited from a $4.9 million Orencia royalty collection and a $1.8 million tenant-improvement allowance in operating cash flow.
- Foreign currency translation losses were $2.998 million for the first nine months of 2015 versus $4.763 million in 2014. The company says currency movements also affected product sales and other income.
Outlook, risks and unusual items
- Management said current cash balances were adequate for at least the next 24 months absent acquisitions. It expected 2015 operating expenses to increase as the bioprocessing business expands and cautioned that gross margins could decline over the remainder of 2015 depending on production volume, shipments and product mix. No revenue or earnings guidance was provided.
- The filing states an expected 2015 effective tax rate of 24.3%, but nearby tax discussion also refers to an estimated annual rate of 22.01%; the filing text does not provide a clear reconciliation.
- Refine-related contingent payments may reach up to $9.9 million for 2015–2016 sales milestones, in addition to potential payments of up to $7.5 million tied to resolution of certain patent disputes. Fair-value estimates depend on sales forecasts and could change materially.
- Customer concentration is significant: in Q3, GE Healthcare represented 26% of revenue and two other bioprocessing customers represented 19% each. Management cautioned that order timing, customer development activity and regulatory approvals can cause quarterly revenue fluctuations.
- Other risks include unhedged foreign-exchange exposure, possible additional financing for acquisitions or development, and a Massachusetts tax examination and appeal. The company increased uncertain tax positions by $0.201 million during Q3; unrecognized tax benefits totaled $2.044 million at September 30. Management reported no legal proceedings expected to have a material adverse effect.
- Potential BioMarin payments of up to $160 million in clinical, regulatory and commercial milestones, plus royalties, are contingent; no related revenue was recognized in the 2015 periods presented.
Important facts for investors to verify
- Clarify the effective-tax-rate references of 24.3% and 22.01% and the potential effects of the pending state tax matter.
- Track Refine sales performance, milestone accruals and payments, and any developments in the related patent disputes.
- Assess whether revenue growth and product margins persist given order timing, customer concentration, currency effects and management’s margin caution.
- Monitor working-capital needs, especially receivables and inventory, alongside operating cash generation and planned business expansion.
- Reconcile the filing’s nine-month SG&A figures: the financial statements report $18.226 million, while the MD&A narrative gives $18.126 million in one passage.