Repligen Corporation — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Unaudited consolidated financial statements; comparisons are with the corresponding 2011 periods unless noted.
Business context
Repligen develops, manufactures and sells bioprocessing products for life-sciences and biopharmaceutical customers. The December 2011 acquisition of Novozymes Biopharma Sweden expanded its product offering and manufacturing capacity. The company also receives royalties on Bristol Myers Squibb’s U.S. Orencia sales, currently scheduled to continue through December 31, 2013, and has therapeutic and diagnostic development programs.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $15.10 million | $8.63 million | $43.45 million | $22.19 million |
| Product revenue | $11.12 million | $5.74 million | $32.13 million | $13.25 million |
| Operating income (loss) | $2.19 million | $0.55 million | $4.67 million | ($1.66 million) |
| Net income (loss) | $1.81 million | $0.60 million | $4.60 million | ($1.48 million) |
| Diluted earnings (loss) per share | $0.06 | $0.02 | $0.15 | ($0.05) |
- Revenue increased 75% in Q3 and 96% year to date. Product revenue rose 94% in Q3 and 142% year to date, primarily reflecting the Novozymes business and higher orders from a large customer. Bristol royalty revenue was $3.96 million in Q3 and $10.62 million year to date.
- Product gross margin, calculated as product revenue less cost of product revenue, was approximately 42% in Q3 and 41% year to date, versus approximately 64% and 62% in the respective 2011 periods. Management attributed pressure in part to product mix and higher-cost Swedish manufacturing. Including royalty revenue and its associated cost, gross margin was approximately 54% for Q3 and 53% year to date.
- Research and development expense fell 21% year over year in both the quarter and nine-month period, as spending on drug programs was reduced. SG&A rose 25% in Q3 and 38% year to date, reflecting acquisition-related costs, staffing and commercialization activity.
- Q3 included a $344,000 contingent-consideration fair-value charge and approximately $500,000 of other expense, primarily foreign-exchange effects. Nine-month results included a $314,000 bargain-purchase gain related to Novozymes working-capital adjustments.
Cash, liquidity and obligations
- At September 30, 2012, cash and cash equivalents were $18.39 million; marketable securities were $11.92 million current and $12.42 million long-term. Cash and marketable securities totaled approximately $42.73 million, up from $36.03 million at December 31, 2011.
- Working capital was $44.76 million, compared with $39.43 million at year-end 2011. Current assets were $53.79 million and current liabilities $9.04 million.
- Operating activities provided $6.21 million of cash in the first nine months, versus $1.12 million used in the 2011 period. Investing activities used $0.30 million; financing activities provided $0.89 million, mainly from option exercises.
- The filing reports no material borrowings or debt balance. Contractual obligations totaled $21.07 million, including $16.66 million in operating leases, $3.71 million in purchase obligations and $0.71 million in minimum contingent consideration.
Outlook, risks and unusual items
- Management said current cash was adequate for at least the next 24 months, absent acquisitions. It expected moderately lower expenses for 2012 than the annualized spending rate for the nine months ended December 31, 2011, and continued investment in bioprocessing products.
- Management expected lower gross margins in the year ending December 31, 2012 than in 2011 because a larger share of products was manufactured in the higher-cost Swedish facility. It also expected R&D spending to decline as the company prioritizes bioprocessing and seeks partners for development programs.
- The FDA issued a complete response letter for RG1068 in June 2012, requesting additional clinical efficacy and safety data. Repligen said it was discontinuing active prosecution of the U.S. NDA and European MAA while seeking development or commercialization partners. It was also seeking partners for two early-stage CNS programs.
- Risks include large-customer and product-order concentration, integration and execution of the Novozymes acquisition, manufacturing costs, foreign-exchange movements, regulatory and clinical uncertainty, and uncertainty about partnership terms or timing. One bioprocessing customer represented 49% of Q3 revenue and 46% of nine-month revenue. Bristol royalties represented 26% and 24%, respectively, and are scheduled to end after 2013.
- The company recorded a 5.17% effective tax rate for the first nine months, primarily reflecting use of prior-year U.S. net operating losses and credits. It maintained a full valuation allowance against U.S. deferred tax assets. Management reported effective disclosure controls and no material change in internal control over financial reporting; it disclosed no known legal proceedings expected to have a material adverse effect.
Important facts for investors to verify
- Whether the Novozymes acquisition can sustain sales growth while improving the acquired business’s manufacturing costs and margins.
- The scale and durability of orders from the largest bioprocessing customer, and the company’s ability to diversify its customer base.
- The expected timing and amount of Bristol royalty revenue through its stated December 2013 end date, and the revenue impact thereafter.
- Progress in securing partners for RG1068 and the CNS programs, including any additional development costs or financing needs.
- Cash generation and working-capital requirements as revenue expands, including contingent acquisition payments and contractual commitments.