Repligen Corporation — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Unaudited results; comparisons are with the corresponding 2013 periods unless stated otherwise.
Business context
Repligen develops and sells bioprocessing products used in biopharmaceutical manufacturing, including Protein A, growth factors, chromatography columns and related products. The June 2 acquisition of Refine Technology added its Alternating Tangential Flow system and expanded Repligen’s product range and direct sales presence. The company continues to focus on bioprocessing and has out-licensed therapeutic programs, including the HDACi portfolio to BioMarin and the SMA program to Pfizer.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $15.28m | $18.82m | $47.16m | $52.79m |
| Product revenue | $15.15m | $12.18m | $45.04m | $37.13m |
| Operating income | $2.22m | $8.04m | $10.63m | $17.69m |
| Net income | $1.47m | $5.89m | $8.57m | $12.77m |
| Diluted EPS | $0.04 | $0.18 | $0.26 | $0.40 |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $16.65m | $18.97m |
- Q3 total revenue fell 19%, while product revenue rose 24%; nine-month total revenue declined 11%, while product revenue grew 21%. Product growth reflected key customer orders and Refine, which contributed about $2.16m in Q3 and $2.63m year to date.
- Q3 net margin was about 9.6%, compared with 31.3% a year earlier; nine-month net margin was about 18.2%, compared with 24.2%. Lower royalty-related revenue and higher operating expenses weighed on earnings.
- Product gross margin was approximately 54% in Q3 and 56% year to date, calculated from reported product revenue and cost of product revenue.
- At September 30, cash and cash equivalents were $35.91m; marketable securities totaled $28.18m, for combined cash and securities of $64.08m. Working capital was $65.22m, down from $75.05m at year-end 2013. Current assets were $75.69m and current liabilities $10.47m.
- Total assets were $128.83m; stockholders’ equity was $114.59m. No borrowings are listed on the balance sheet. Nine-month investing cash outflow was $18.57m, including $21.24m for Refine, partly offset by net security redemptions.
- Q3 comprehensive loss was $1.66m despite net income, primarily reflecting a $3.16m foreign-currency translation loss. The nine-month translation loss was $4.76m.
Material changes and unusual items
- The comparison is affected by the cessation of Bristol-Myers Squibb’s Orencia royalties after December 31, 2013. Those royalties contributed $4.83m in Q3 2013 and $12.96m in the first nine months of 2013; none was recorded in 2014.
- Q3 2013 also included $1.09m of Pfizer-related revenue and $0.72m of sponsored research revenue. Nine-month 2013 comparisons included $1.22m from Pfizer and $1.48m of sponsored research revenue. The relevant sponsored research agreement was completed, with no significant future revenue expected.
- Repligen recognized $2.1m of BioMarin revenue in the first nine months of 2014, including $2.0m upfront and $0.13m for completed technology transfer. It may receive up to $160m in contingent milestones and royalties; these future amounts are not assured and are recognized when earned.
- Refine consideration included $21.24m cash, $4.0m in shares and an estimated $1.37m fair value of contingent consideration. Additional payments may include up to $10.9m tied to sales targets and up to $7.5m tied to resolution of specified patent disputes. Purchase-price allocation remained preliminary.
- Q3 SG&A rose 54%, mainly from Refine-related costs (including approximately $0.88m of acquisition costs) and higher personnel and facility expenses. Nine-month R&D declined 28% following the strategic reduction in therapeutic development, partly offset by increased bioprocessing R&D.
Outlook, risks and contingencies
- Management expected gross margins could decline during the remainder of 2014 because of production volume, shipments and product mix. It expected SG&A in the remaining quarter to be similar to levels incurred in the first half as customer-facing activities expanded.
- Management stated that cash balances were adequate for at least 24 months absent acquisitions of additional products, candidates or intellectual property. Additional acquisitions or financing needs could require new debt or equity; financing may be unavailable or unfavorable, and equity issuance could dilute shareholders.
- Revenue may fluctuate with order timing, customer development programs and regulatory approvals. Customer concentration is notable: three bioprocessing customers represented 73% of Q3 revenue and 77% of nine-month revenue.
- Other identified risks include replacing expired Orencia royalties, integrating Refine, foreign exchange exposure (the company did not hedge it), customer demand and product acceptance, intellectual-property disputes, and dependence on collaborative, supply and distribution relationships. No material legal proceeding was identified; the filing reported no material changes to previously disclosed risk factors, except as noted in its prior-quarter filing.
- Operating lease obligations totaled $14.88m and purchase obligations $6.73m; estimated contingent consideration was $1.89m. The expanded Waltham lease added 19,900 square feet and approximately $361,000 in annualized rent.
Important facts for investors to verify
- How much of product growth reflects underlying demand versus Refine contributions, and whether growth persists given customer and order concentration.
- Product gross-margin trajectory, particularly management’s warning about possible near-term pressure.
- Refine integration progress, final purchase-price allocation, and likelihood and timing of contingent payments.
- Whether BioMarin milestones or royalties are achieved; the potential headline amount is contingent, not committed revenue.
- Cash generation and liquidity after acquisition spending, as well as capital needs if further acquisitions are pursued.
- Exposure to foreign-currency movements and the continuing absence of Bristol Orencia royalties.