Business context and reporting period
Repligen Corporation supplies bioprocessing products, including Protein A, cell-culture growth factors and chromatography columns; it also develops diagnostic and therapeutic candidates and receives royalties on U.S. Orencia sales. This is a transition report for the nine months from April 1 to December 31, 2011, following a change in fiscal year-end from March 31 to December 31. Figures below are in U.S. dollars; financial comparisons are to the nine months ended December 31, 2010 unless stated otherwise.
On December 20, 2011, Repligen acquired Novozymes’ biopharma business in Sweden, expanding its product portfolio and doubling manufacturing capacity. The acquisition closed near period-end, so the acquired business contributed only a brief period of reported operating results.
Financial performance and liquidity
| Metric | Nine months ended Dec. 31, 2011 | Comparison / detail |
|---|---|---|
| Total revenue | $23.45 million | Up 10% from $21.38 million |
| Product revenue | $13.22 million | Up 12%; volume rose 14%, partly offset by product mix |
| Royalty and other revenue | $10.24 million | Up 7%; includes $8.77 million of Bristol royalties |
| Operating loss | $1.11 million | Prior comparable period had $1.71 million operating income |
| Net loss / diluted loss per share | $1.61 million / $0.05 | Prior comparable period had $1.99 million net income / $0.06 diluted EPS |
| Operating cash flow | $2.31 million provided | Compared with $1.79 million provided |
| Cash and marketable securities | $36.03 million at Dec. 31, 2011 | Down from $61.50 million at Mar. 31, 2011 |
| Working capital | $39.43 million | Down from $51.22 million at Mar. 31, 2011 |
| Debt and obligations | No material funded debt identified | $19.97 million of operating lease commitments; $2.33 million of purchase obligations |
Product gross margin was approximately 61% (product revenue less cost of product revenue). Reported total operating costs and expenses were $24.56 million, including $9.46 million of R&D and $9.05 million of SG&A. SG&A included about $1.7 million of Novozymes transaction costs. A $427,000 bargain-purchase gain partially offset expenses. The filing reports $5.01 million of net cash used in investing activities, including the acquisition payment, capital expenditures and marketable-security transactions.
For the quarter ended December 31, 2011, revenue was $7.17 million and net loss was $2.16 million. The filing’s fiscal-period change means this quarter is not the full reporting period covered by the transition report.
Material changes and unusual items
- Novozymes acquisition consideration was $28.50 million, comprising $26.88 million paid in cash and $1.61 million estimated contingent consideration; up to a further €4.0 million may be payable if specified sales and technology-transfer conditions are met. The purchase-price allocation was preliminary.
- Revenue growth reflected higher orders from the largest bioprocessing customer and increased Bristol royalties. Product sales remain subject to timing and mix of large customer orders.
- SG&A rose 62%, mainly due to acquisition transaction expenses and increased SecreFlo commercialization, business-development and OPUS activities. R&D rose 8%, including greater SecreFlo and spinal muscular atrophy program costs, partly offset by reduced spending on discontinued bipolar-depression candidate RG2417.
- Cash and marketable securities declined substantially, primarily reflecting the acquisition cash payment and related portfolio changes. The company repurchased 100,000 shares for $331,000 during the nine-month period.
- Operating lease commitments total $19.97 million. The expanded Waltham headquarters lease extends to approximately 2023; Sweden facilities are leased through 2017 and 2019.
Outlook, commentary and principal risks
- Management expected bioprocessing product sales to more than double in calendar 2012 following the acquisition, while cautioning that acquired products could carry lower gross margins. It expected 2012 Bristol royalties to increase moderately and sponsored research revenue to remain relatively consistent.
- Management anticipated higher 2012 R&D and SG&A, including approximately $3.0–$4.0 million of SecreFlo-related R&D spending. It believed existing cash was sufficient for at least 24 months, excluding additional acquisitions.
- SecreFlo’s NDA received FDA priority review, with a June 21, 2012 PDUFA goal date; an EMA application was submitted in March 2012. Approval is uncertain, and the applications rely on a re-read of a single Phase 3 trial. Commercial launch would require additional infrastructure and manufacturing arrangements.
- RG3039 for spinal muscular atrophy had entered Phase 1 testing. RG2833 for Friedreich’s ataxia remained on FDA clinical hold; the company planned a Phase 1 study in Italy. Repligen discontinued further investment in RG2417 after its Phase 2b study failed to show statistically significant benefit.
- Revenue concentration is significant: one bioprocessing customer accounted for 44% of total revenue, and Bristol royalties accounted for 37%. The Bristol royalty agreement ends December 31, 2013, and Repligen does not control Bristol’s sales efforts.
- Key risks include integrating the Novozymes business and realizing expected benefits, customer concentration, competition and potential Protein A price pressure, regulatory and clinical-trial outcomes, reliance on third-party manufacturers, foreign-exchange and international operating exposure, and possible impairment of acquired intangible assets. Management’s internal-control assessment excluded Repligen Sweden; management and the auditor reported effective controls for the assessed company.
Investor verification priorities
- Confirm the post-acquisition revenue run rate, order trends and customer concentration, particularly the largest bioprocessing customer’s 44% share.
- Track acquisition integration, actual gross margins, contingent payments and final purchase-price allocation.
- Verify SecreFlo regulatory decisions, manufacturing readiness, commercialization costs and the outcome of the EMA review.
- Assess the durability of Bristol royalty income ahead of its contractual expiration at the end of 2013.
- Monitor cash use, working-capital needs, lease commitments and management’s 24-month liquidity assumption.
- Review clinical and regulatory milestones for RG3039 and RG2833, including the status of the FDA hold on RG2833.