Repligen Corporation — Q2 2012 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2012. Repligen develops and sells bioprocessing products, including Protein A products and chromatography columns, and also receives royalties and research-related revenue. Following its December 2011 acquisition of Novozymes Biopharma Sweden, the company is prioritizing growth of its bioprocessing business and seeking partners for therapeutic and diagnostic programs.
Financial performance and position
| Metric | Three months ended June 30, 2012 | Six months ended June 30, 2012 |
|---|---|---|
| Total revenue | $15.52 million (up 103% year over year) | $28.35 million (up 109%) |
| Product revenue | $11.66 million (up 168%) | $21.00 million (up 180%) |
| Royalty and other revenue | $3.86 million | $7.35 million |
| Operating income (loss) | $1.32 million; prior-year loss $0.12 million | $2.48 million; prior-year loss $2.21 million |
| Net income (loss) | $1.57 million; prior-year loss $0.06 million | $2.80 million; prior-year loss $2.09 million |
| Diluted earnings (loss) per share | $0.05; prior-year loss approximately $0.00 | $0.09; prior-year loss $0.07 |
- Margins: Product gross margin was approximately 37% in Q2 and 40% for the first half, versus approximately 64% and 61% in the respective 2011 periods. Management attributed lower margins principally to acquired product mix and higher manufacturing costs in Sweden. Net margin was approximately 10% for both 2012 periods.
- Cash flow: First-half operating cash flow was $3.74 million, compared with cash used of $1.27 million in 2011. Investing activities provided $0.99 million, largely reflecting net redemptions of securities; financing activities provided $0.13 million. Cash increased $4.71 million to $15.88 million.
- Liquidity: Cash and marketable securities totaled approximately $39.23 million at June 30, 2012, excluding $0.20 million restricted cash. Working capital was $42.63 million, up from $39.43 million at December 31, 2011. Management said existing cash was adequate for at least 24 months, absent acquisitions, but noted future financing might be needed for acquisitions or other investment.
- Debt and commitments: The balance sheet reports no borrowings or debt balance. Disclosed fixed obligations and commitments totaled $22.03 million, including $16.52 million of operating leases, $4.81 million of purchase obligations, and $0.71 million of minimum contingent consideration.
- Balance sheet: Total assets were $81.45 million and stockholders’ equity $68.73 million at June 30, 2012. Accounts receivable rose to $7.81 million from $2.83 million at year-end, while inventory declined to $11.50 million from $13.36 million.
Material changes versus prior periods
- Revenue growth mainly reflected the Novozymes acquisition and higher orders from a large bioprocessing customer; Bristol-Myers Squibb Orencia royalties also increased. Product revenue more than doubled in both reported comparisons.
- Operating costs rose with the acquired business and higher product volume. First-half R&D expense fell 22%, while SG&A rose 45%, including acquisition-related costs and increased commercial activity.
- First-half results included a $314,000 bargain-purchase gain from a Novozymes working-capital adjustment and $568,000 of other income, primarily foreign-currency gains. The acquisition’s purchase-price allocation remained preliminary.
- Repligen received an FDA complete response letter for RG1068 in June 2012 requesting additional clinical efficacy and safety data. The company plans to discontinue active prosecution of the U.S. and European applications and seek a development or commercialization partner.
Outlook, commentary, and risks
- Management expected 2012 gross margins to be lower than in 2011 because of the higher-cost Swedish manufacturing mix, despite beginning to reduce headcount and related costs there. It anticipated moderately lower expenses in 2012 as RG1068 pre-commercialization spending was deferred, and said R&D expense would likely decline as the company focuses on bioprocessing and partnering.
- The Bristol royalty stream is expected to continue through December 31, 2013; Repligen remits 15% of those royalties to the University of Michigan. The royalty stream represented 23% of first-half 2012 revenue.
- Revenue is concentrated: one bioprocessing customer represented 44% of first-half revenue, and two other named bioprocessing customers represented 13% and 12%. Large production-order timing and customer or regulatory developments can cause significant quarterly fluctuations.
- The company intends to seek partners for RG1068 and its early-stage Friedreich’s ataxia and spinal muscular atrophy programs. There is no assurance that partnerships can be completed on acceptable terms, or at all; failure to do so could prevent monetization of these assets.
- International operations create foreign-exchange exposure: 31% of Q2 revenue and 43% of Q2 costs and expenses were denominated in foreign currencies, primarily Swedish kronor. A hypothetical 100-basis-point decline in interest rates would reduce investment fair value by approximately $252,000.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing disclosed no legal proceedings believed likely to have a material adverse effect.
Important facts for investors to verify
- Whether acquired Swedish operations can improve manufacturing economics and sustain margins as integration proceeds.
- How much revenue and cash flow depend on major bioprocessing customers and on the Bristol royalty stream, which ends after 2013 under the disclosed arrangement.
- Whether partners can be secured for RG1068 and the other clinical programs, and what additional FDA-requested RG1068 trials could entail.
- The final Novozymes purchase-price allocation, contingent payments, and execution of the company’s stated expense and cash-runway expectations.