Repligen Corporation (NASDAQ: RGEN) — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Interim financial statements are unaudited. Repligen develops and sells bioprocessing technologies and systems used in biologic drug manufacturing.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $94.1 million | $69.4 million | $257.6 million | $200.8 million |
| Revenue growth | 35.4% | — | 28.3% | — |
| Income from operations | $21.0 million | $8.0 million | $52.4 million | $30.2 million |
| Net income | $14.6 million | $1.7 million | $40.2 million | $17.8 million |
| Diluted EPS | $0.27 | $0.03 | $0.75 | $0.37 |
| Gross margin | 57.9% | 54.7% | 57.9% | 55.7% |
| Operating cash flow | — | $47.8 million | $49.5 million |
- Product revenue drove growth: it rose 35.5% in Q3 and 28.3% for the nine-month period. Management cited continued customer adoption, stronger chromatography and filtration demand, and accelerated protein and filtration demand, including from customers working on COVID-19 vaccines and therapeutics.
- Q3 operating income improved substantially year over year. For the nine months, higher revenue and gross margin lifted operating income, while SG&A increased 23.7%; R&D expense declined 5.7%.
- Cash and cash equivalents were $553.3 million at September 30, 2020, versus $528.4 million at December 31, 2019. Working capital was $645.7 million, up $52.2 million from year-end.
- Nine-month investing cash use was $43.1 million, including $28.5 million for EMT and capital expenditures. Financing provided $7.1 million, mainly from stock-option exercises. Operating cash flow was slightly lower than the prior-year period, with higher receivables and inventory absorbing cash; inventory increased $22.8 million in operating cash-flow movements.
- At September 30, the company had $287.5 million principal amount of 0.375% convertible notes due 2024, with a $240.9 million net carrying value. Their disclosed fair value was $416.0 million. The notes were not convertible at the holder’s option for Q4 2020 under the applicable conversion test. No credit facility or other debt is reported in the supplied filing text.
Material changes and unusual items
- Q3 and nine-month revenue gains reflect both organic demand and acquisition-related comparisons. C Technologies contributed $23.3 million of revenue in the first nine months of 2020; the 2019 comparative period included only four months after its May 2019 acquisition.
- Repligen acquired Engineered Molding Technology (EMT) on July 13, 2020 for approximately $28.5 million. The acquisition expands single-use silicone assemblies and components. Purchase-price allocation remained preliminary; it included approximately $12.6 million of goodwill and $14.4 million of identifiable intangible assets.
- Q3 2019 included a $5.7 million loss on extinguishment of debt related to settlement of the prior convertible notes; there was no comparable charge in 2020. Lower investment income in 2020 reflected reduced interest rates. Nine-month interest expense rose year over year, primarily reflecting the 2019 notes.
- Gross margin increased year over year; management attributed the improvement, excluding acquisition inventory step-up charges, mainly to revenue growth and favorable product volume and mix. Q3 2020 included $0.1 million of EMT inventory step-up amortization.
- Non-GAAP adjusted net income was $21.2 million, or $0.40 diluted per share, in Q3 2020, versus $13.3 million, or $0.26, in Q3 2019. For nine months, it was $60.4 million, or $1.13, versus $41.7 million, or $0.87. These company-defined measures exclude specified acquisition, amortization, interest, tax and other items; they supplement, not replace, GAAP results.
Outlook, risks and contingencies
- The filing provides no specific numerical revenue or earnings guidance. Management expected direct sales to continue increasing through the remainder of 2020, particularly from COVID-19-related customers scaling candidates through clinical trials, and expected operating expenses and R&D spending to rise as the business expands.
- Management said COVID-19 had not materially affected results or operations through September 30, but its future impact was uncertain. Sales can fluctuate with large production orders, customer development programs and regulatory approvals.
- Liquidity was considered adequate for at least 24 months absent acquisitions of additional products, candidates or intellectual property. Management cautioned that acquisitions, weaker demand or other needs could require additional financing; equity or convertible financing could dilute shareholders, and debt may impose restrictive covenants.
- Customer concentration remains relevant: MilliporeSigma represented 11% of nine-month 2020 revenue; the filing identifies reliance on two significant customers overall. The company also cites risks involving collaboration and supply relationships, manufacturing capacity and third parties, competition, product adoption, acquisition integration, intellectual property, regulation, staffing and foreign exchange. It did not hedge its foreign-currency exposure.
- Subsequent events: NMS was acquired on October 20, 2020. On October 27, Repligen agreed to acquire ARTeSYN for approximately $200 million—about $130 million cash and $70 million in stock—with closing expected in Q4 2020 subject to conditions. The ARTeSYN deal was not yet closed as of the filing.
- The company reported no material legal proceedings known to management and no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective; the EMT acquisition was excluded from the period’s internal-control assessment scope.
Investor verification points
- Check whether accelerated demand, especially COVID-19-related demand, persisted and whether quarterly order timing affected subsequent growth.
- Track gross margin, manufacturing capacity, inventory build and operating cash conversion as sales expand.
- Review integration, preliminary purchase accounting and realized contribution from EMT and NMS, and the completion, financing and dilution implications of the proposed ARTeSYN acquisition.
- Assess the convertible notes’ conversion and settlement terms, including the gap between carrying value and disclosed fair value.
- Monitor customer concentration, supply and collaboration relationships, and the uncertain effects of COVID-19 and foreign-exchange movements.