Repligen Corporation — Form 10-Q Summary
Business context and period: The filing covers the quarter ended September 30, 2011, and the six months ended that date. Repligen develops therapeutic candidates, sells bioprocessing products, and receives royalties on Bristol-Myers Squibb’s U.S. Orencia sales. Its reported results are unaudited.
Financial performance
| Metric | Three months ended Sep. 30, 2011 | Year-over-year change | Six months ended Sep. 30, 2011 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $8.63 million | Up 18% | $16.29 million | Up 14% |
| Product revenue | $5.74 million | Up 30% | $10.10 million | Up 16% |
| Operating income | $552,000 | Up 5% | $431,000 | Down 70% |
| Net income | $605,000 | Down 3% | $549,000 | Down 66% |
| Diluted EPS | $0.02 | Unchanged | $0.02 | Down from $0.05 |
- Quarterly operating margin was approximately 6.4%, versus 7.2% a year earlier; six-month operating margin was 2.6%, versus 9.9%. Quarterly net margin was approximately 7.0%, versus 8.5%; six-month net margin was 3.4%, versus 11.3%.
- Quarterly operating expenses rose 19% to $8.08 million. For the six-month period they rose 23% to $15.85 million, led by increased R&D and selling, general and administrative costs.
- Cash and cash equivalents were $10.50 million at September 30. Cash plus current and long-term marketable securities totaled $58.27 million, down from $61.50 million at March 31. Working capital was $55.86 million, up from $51.22 million.
- Six-month operating cash flow was a use of $2.56 million, compared with $674,000 provided in the prior-year period. The principal cash use included a $2.76 million increase in accounts receivable. Investing activities used $810,000; financing activities used $331,000, mainly for share repurchases.
- Total liabilities were $4.73 million, including $4.15 million of current liabilities. The balance sheet does not present borrowings as a separate debt balance. No off-balance-sheet arrangements were reported.
Material changes and management commentary
- Bioprocessing product sales and Bristol royalties drove revenue growth. Bristol royalties were $2.79 million for the quarter and $5.56 million for six months; royalties represented 32% and 34% of total revenue, respectively, in those periods.
- Revenue and receivables are concentrated: the largest bioprocessing customer accounted for 58% of quarterly revenue and 52% of accounts receivable at September 30. The Bristol royalty receivable represented 41% of accounts receivable.
- Six-month R&D expense rose 13% to $6.59 million. Increased RG1068 manufacturing and NDA-related costs and RG3039 SMA development costs were partly offset by discontinuation of RG2417 for bipolar disorder. RG1068 commercialization preparation also contributed to the 33% increase in six-month SG&A.
- No income tax provision was recorded; the effective rate was 0%. The company cited prior-year tax attributes and estimated losses for the fiscal year. It reported substantial federal and state loss and credit carryforwards, subject to limitations, and a full valuation allowance against deferred tax assets.
Outlook, transaction, risks, and contingencies
- On October 27, 2011, after quarter-end, Repligen agreed to acquire Novozymes’ Lund, Sweden bioprocessing business. The stated upfront purchase price is €17 million (approximately $22.7 million), with up to €4 million (approximately $5.3 million) of earn-out, milestone, and technology-transfer payments. Management expected to close in the fourth quarter of 2011, subject to customary conditions, including transfer of permits. The company expected to fund the purchase with cash on hand.
- Management said existing cash and investments were adequate for foreseeable needs absent acquisitions. It also noted that acquisitions, clinical development, product sales, royalties, and potential financing needs could change capital requirements; additional equity financing could dilute shareholders.
- Management cautioned that bioprocessing orders can fluctuate by quarter and may not indicate a trend. Therapeutic candidates have uncertain development timelines, regulatory outcomes, and revenue potential. RG1068 was being prepared for launch pending FDA approval.
- Risks highlighted for the proposed acquisition include failure to close, transaction and integration costs, difficulty realizing expected benefits, customer or employee disruption, and increased foreign-operation, regulatory, tax, and environmental exposure. The acquired business uses hazardous materials and Staphylococcus aureus and its toxins.
- Other disclosed exposures include customer concentration, reliance on Bristol royalties, interest-rate sensitivity (a hypothetical 100-basis-point increase would reduce investment fair value by about $294,000), clinical and regulatory uncertainty, and potential inventory write-downs if demand changes. No material legal proceedings were identified; a Massachusetts tax audit was ongoing with no proposed adjustments reported.
Important facts for investors to verify
- Whether the Novozymes transaction closed as expected, its final consideration, and subsequent integration costs and performance.
- Whether RG1068 received FDA approval and the timing and cost of commercialization; also the development progress and funding needs of RG3039.
- Whether customer concentration and timing of large product orders continue to support revenue growth, and whether receivable collections improve after the working-capital outflow.
- The sustainability of Bristol royalty revenue and the impact of the 15% royalty remittance to the University of Michigan, which runs through December 2013.
- Actual cash and investment balances, operating cash flow, and any financing or dilution needs following the acquisition and continued R&D spending.