Overview

We are a biopharmaceutical company focused primarily on the development of novel therapeutics for diseases that affect the central nervous system. A number of drug development programs are currently being conducted to evaluate our drug candidates in diseases such as bipolar disorder and neurodegeneration. In addition, we sell Protein A for monoclonal antibody purification and receive royalties on intellectual property that we license to third parties. Our business strategy is to deploy the profits from our current commercial products and patents licensing revenues to enable us to invest in the development of our therapeutic product candidates while reducing our financial risk.

Critical Accounting Policies and Estimates

A "critical accounting policy" is one which is both important to the portrayal of the Company's financial condition and results and requires management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. For additional information, please see the discussion of our significant accounting policies in Note 2 to the Financial Statements included in our Annual Report on Form 10-K dated March 31, 2008.

Results of Operations

Three month period ended September 30, 2008 vs. September 30, 2007

Total revenue

Total revenues for the three-month periods ended September 30, 2008 and September 30, 2007 were approximately $5,090,000 and $5,352,000 respectively, a decrease of $262,000 or 5%.

Sales of Protein A for the three-month periods ended September 30, 2008 and September 30, 2007 were $2,984,000 and $4,516,000, respectively. The decrease of $1,532,000, or 34%, was largely the result of lower overall sales volume as the prior quarter was unusually high as a result of the timing of customer orders.

Substantially all of our products based on recombinant Protein A are sold to customers who incorporate our manufactured products into their proprietary antibody purification systems to be sold directly to the pharmaceutical industry. Monoclonal antibodies are a well-established class of drug with applications in rheumatoid arthritis, asthma, Crohn's disease and a variety of cancers. Sales of Protein A are therefore impacted by the timing of large-scale production orders and on the regulatory approvals for such antibodies, which may result in significant quarterly fluctuations.

In April 2008, we settled our outstanding litigation with Bristol. We have therefore begun recognizing royalty revenue in fiscal year 2009 for Bristol's net sales in the United States of Orencia® which is used in the treatment of rheumatoid arthritis. Pursuant to the Bristol Settlement, we have recognized $1,780,000 in royalty revenue in the three months ended September 30, 2008. Additionally, during the three-month periods ended September 30, 2008 and September 30, 2007, we earned and recognized approximately $215,000 and $56,000, respectively, in royalty revenue from ChiRhoClin.

During the three-month periods ended September 30, 2008, and September 30, 2007, we recognized approximately $110,000 and $139,000, respectively, of revenue from various sponsored research and development projects. Research revenue is recognized for costs plus fixed-fee contracts as costs are incurred.

As previously disclosed, we have ceased sales of SecreFlo ® in the current year due to the expiration of our agreement with our sole supplier, ChiRhoClin. There were no sales of SecreFlo® in the current quarter and we will no longer sell the product going forward. Sales of SecreFlo® for the quarter ended September 30, 2007 were $640,000.

Operating expenses

Total operating expenses, exclusive of the net gain from litigation settlement, were approximately $5,414,000 and $4,752,000 for the three-month periods ended September 30, 2008 and September 30, 2007, respectively, an increase of $662,000 or 14%.

Cost of product revenue was approximately $1,211,000 and $1,412,000 for the three-month periods ended September 30, 2008 and September 30, 2007, respectively, a decrease of $201,000 or 14%. This decrease is primarily due to the decrease in Protein A sales noted above, as well as increased depreciation and occupancy expenses related to expansion of our manufacturing capacity and increased headcount in the three-month period ended September 30, 2008.

In connection with the Bristol Settlement, we must remit 15% of royalty revenue received through the expiration of the settlement agreement in December 2013, after deducting certain allowable legal and other costs, to the University of Michigan. For the three-month period ended September 30, 2008, this cost of royalty revenue was $211,000.

Research and development expenses were approximately $2,463,000 and $1,154,000 for the three-month periods ended September 30, 2008 and September 30, 2007, respectively, an increase of $1,309,000 or 113%. The increase is due to increased overall activity, in comparison to the prior period, in our two clinical trials as well as ongoing research and development costs incurred investigating potential clinical candidates to be used in the treatment of Friedreich's Ataxia. Specifically, as patient enrollment continues to progress in our phase 3 clinical trial for RG1068, evaluating the use of human secretin in aiding pancreatic imaging, we have increased spending versus the prior period by $150,000. In addition, we have engaged a clinical research organization to assist in the deployment of our phase 2b clinical trial for RG2417, evaluating the use of uridine to treat bi-polar depression, and otherwise increased overall clinical trial efforts, adding an incremental $439,000 of spending compared to the prior period. Finally, our Friedreich's Ataxia spending has also increased by $431,000 as we continue our research efforts. Significant fluctuations in research and development expenses may occur from period to period depending on the nature, timing, and extent of development activities over any given period of time.

Selling, general and administrative expenses were approximately $1,529,000 and $2,186,000 for the three-month periods ended September 30, 2008 and September 30, 2007, respectively, a decrease of $657,000 or 30%. This decrease is largely attributable to a $1,030,000 decrease in litigation expenses related to our patent infringement settlements with both ImClone and Bristol, partially offset by increased headcount and recruiting costs as we expand our business development and other functions to support the business.

Interest income

Interest income was approximately $515,000 and $366,000 for the three-month periods ended September 30, 2008 and September 30, 2007, respectively. The increase is primarily due to a significantly higher average investment balance during the three month period ended September 30, 2008.

Income Tax Provision

The Company had income before taxes of approximately $193,000 and $41,134,000 for the three month periods ended September 30, 2008 and 2007, respectively. The Company had an income tax provision of $50,000 and $827,000 for the three month periods ended September 30, 2008 and 2007, respectively. Prior to the $40.2 million litigation gain from in the second quarter of fiscal 2008, the company had net operating losses and other research credits that reduced our effective tax rate to zero. For fiscal year 2009, we anticipate an effective tax rate of approximately 2.99%. The effective tax rate differs from the statutory tax rate due to the continued utilization of prior year net operating losses and credits, offset by the effects of the alternative minimum tax ("AMT") on income derived during the fiscal year.

The Company has net operating loss carryforwards of approximately $63,050,000, business tax credits carryforwards of approximately $2,205,000, and other tax credits of approximately $733,000 available to reduce future federal income taxes, if any.

Additionally, the Company also has business tax credits carryforwards of approximately $2,665,000 available to reduce future state income taxes, if any. The Company has utilized all available state net operating loss carryforwards. The net operating loss and business tax credits carryforwards will continue to expire at various dates through March 2026. The net operating loss and business tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and may be limited in the event of certain changes in the ownership interest of significant stockholders.

As of September 30, 2008, a full valuation allowance has been provided against the net operating losses, business tax credits and other deferred tax assets, as it is uncertain if the Company will realize the benefits of such deferred tax assets.

Six month period ended September 30, 2008 vs. September 30, 2007

Total revenue

Total revenues for the six-month periods ended September 30, 2008 and September 30, 2007 were approximately $18,750,000 and $11,331,000 respectively, an increase of $7,419,000 or 65%.

Sales of Protein A for the six-month periods ended September 30, 2008 and September 30, 2007 were $8,481,000 and $9,710,000, respectively. The decrease of $1,229,000, or 13%, was largely the result of lower overall sales volume as the prior period was unusually high as a result of the timing of customer orders.

Substantially all of our products based on recombinant Protein A are sold to customers who incorporate our manufactured products into their proprietary antibody purification systems to be sold directly to the pharmaceutical industry. Monoclonal antibodies are a well-established class of drug with applications in rheumatoid arthritis, asthma, Crohn's disease and a variety of cancers. Sales of Protein A are therefore impacted by the timing of large-scale production orders and on the regulatory approvals for such antibodies, which may result in significant quarterly fluctuations.

In April 2008, we settled our outstanding litigation with Bristol. We have therefore begun recognizing royalty revenue in fiscal year 2009 for Bristol's net sales in the United States of Orencia ® which is used in the treatment of rheumatoid arthritis. Pursuant to the Bristol Settlement, we have recognized $9,677,000 in royalty revenue in the six-month period ended September 30, 2008. Additionally, during the six-month periods ended September 30, 2008 and September 30, 2007, we earned and recognized approximately $285,000 and $103,000, respectively, in royalty revenue from ChiRhoClin.

During the three-month periods ended September 30, 2008, and September 30, 2007, we recognized approximately $110,000 and $340,000, respectively, of revenue from various sponsored research and development projects. Research revenue is recognized for costs plus fixed-fee contracts as costs are incurred.

As previously disclosed, we have ceased sales of SecreFlo® in the current year due to the expiration of our agreement with our sole supplier, ChiRhoClin. Sales of SecreFlo® for the six-month periods ended September 30, 2008 and September 30, 2007 were $168,000 and $640,000, respectively.

Operating expenses

Total operating expenses, exclusive of the net gain from litigation settlement, were approximately $11,117,000 and $10,746,000 for the six-month periods ended September 30, 2008 and September 30, 2007, respectively, an increase of $371,000 or 3%.

Cost of product revenue was approximately $3,057,000 and $3,127,000 for the six-month periods ended September 30, 2008 and September 30, 2007, respectively, a decrease of $70,000 or 2%. This decrease is primarily due to the decrease in Protein A sales noted above, as well as increased depreciation and occupancy expenses related to expansion of our manufacturing capacity and increased headcount in the six-month period ended September 30, 2008.

In connection with the Bristol Settlement, we must remit 15% of royalty revenue received through the expiration of the settlement agreement in December 2013, after deducting certain allowable legal and other costs, to the University of Michigan. For the six-month period ended September 30, 2008, this cost of royalty revenue was $536,000.

Research and development expenses were approximately $4,548,000 and $3,291,000 for the six-month periods ended September 30, 2008 and September 30, 2007, respectively, an increase of $1,257,000 or 38%. The increase is due to increased overall activity, in comparison to the prior period, in our two clinical trials as well as ongoing research and development costs incurred investigating potential clinical candidates to be used in the treatment of Friedreich's Ataxia. Specifically, as patient enrollment continues to progress in our phase 3 clinical trial for RG1068, evaluating the use of human secretin in aiding pancreatic imaging, we have increased spending versus the prior period by $647,000. In addition, we have engaged a clinical research organization to assist in the deployment of our phase 2b clinical trial for RG2417, evaluating the use of uridine to treat bi-polar depression, and otherwise increased overall clinical trial efforts, adding an incremental $284,000 of spending compared to the prior period. Finally, our Friedreich's Ataxia spending has also increased by $35,000 as we continue our research efforts. Significant fluctuations in research and development expenses may occur from period to period depending on the nature, timing, and extent of development activities over any given period of time.

Selling, general and administrative expenses were approximately $2,976,000 and $4,328,000 for the six-month periods ended September 30, 2008 and September 30, 2007, respectively, a decrease of $1,352,000 or 31%. This decrease is largely attributable to a $1,841,000 decrease in litigation expenses related to our patent infringement settlements with both ImClone and Bristol, partially offset by increased headcount and recruiting costs as we expand our business development and other functions to support the business.

Interest income

Interest income was approximately $1,048,000 and $623,000 for the six-month periods ended September 30, 2008 and September 30, 2007, respectively. The increase is primarily due to a significantly higher average investment balance during the six-month period ended September 30, 2008.

Income Tax Provision

The Company had income before taxes of approximately $8,680,000 and $41,374,000 for the six-month periods ended September 30, 2008 and 2007, respectively. The Company had an income tax provision of $260,000 and $827,000 for the six-month periods ended September 30, 2008 and 2007, respectively. Prior to the $40.2 million litigation gain in the second quarter of fiscal 2008, the company had net operating losses and other research credits that reduced our effective tax rate to zero. For fiscal year 2009, we anticipate an effective tax rate of approximately 2.99%. The effective tax rate differs from the statutory tax rate due to the continued utilization of prior year net operating losses and credits, offset by the effects of the alternative minimum tax ("AMT") on income derived during the fiscal year.

The Company has net operating loss carryforwards of approximately $63,050,000, business tax credits carryforwards of approximately $2,205,000, and other tax credits of approximately $733,000 available to reduce future federal income taxes, if any. Additionally, the Company also has business tax credits carryforwards of approximately $2,665,000 available to reduce future state income taxes, if any. The Company has utilized all available state net operating loss carryforwards. The net operating loss and business tax credits carryforwards will continue to expire at various dates through March 2026. The net operating loss and business tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and may be limited in the event of certain changes in the ownership interest of significant stockholders.

As of September 30, 2008, a full valuation allowance has been provided against the net operating losses, business tax credits and other deferred tax assets, as it is uncertain if the Company will realize the benefits of such deferred tax assets.

Liquidity and capital resources

We have financed our operations primarily through sales of equity securities, revenues derived from product sales and grant and research agreements and more recently from consideration received as a result of the successful settlement of litigation. Our revenue for the foreseeable future will be primarily limited to our product revenue related to Protein A, royalties from Bristol for their United States net sales of Orencia®, research grants, interest income and other revenue. Revenues derived from the sales of SecreFlo® vials, as anticipated and previously disclosed, have ceased as of the six-month period ended September 30, 2008. Given the uncertainties related to pharmaceutical product development, we are currently unable to reliably estimate when, if ever, our therapeutic product candidates will generate revenue and cash flows. Total cash, cash equivalents and marketable securities at September 30, 2008 totaled approximately $65,606,000, an increase of $5,017,000 from $60,589,000 at March 31, 2008.

Operating activities

Our operating activities provided cash of approximately $5,513,000 for the six-month period ended September 30, 2008. Cash provided by operations is primarily due to net income of $8,463,000, plus certain non-cash expenses such as $503,000 for depreciation and $359,000 in stock-based compensation expense, offset by a $2,464,000 increase in accounts receivable, a $1,552,000 increase in accounts payable and accrued liabilities and a $210,000 decrease in inventory. Accounts receivable increased as a result of the $1,780,000 royalty revenue from Bristol for Orencia ® sales for the three-months ended September 30, 2008 which were recognized when earned but is not due until after quarter end, as well as other increases in trade accounts receivable related to sales made in the last month of quarter. The decrease in accounts payable and accrued expenses from year end was largely the result of the payment of outstanding legal invoices associated with the Bristol litigation that was completed in April 2008.

Investing activities

Our investing activities consumed approximately $10,920,000 for the six-month period ended September 30, 2008 as we made $10,456,000 net purchases of marketable securities, investing the funds provided by our operating activities above. In addition, the Company invested approximately $463,000 in equipment purchases and improvements to the Company's facility.

Financing activities

Stock option exercises provided cash proceeds of approximately $258,000 for the six-month period ended September 30, 2008. Share repurchases for the period consumed $289,000.

We do not currently use derivative financial instruments. We generally place our marketable security investments in high quality credit instruments as specified in our investment policy guidelines.

Working capital increased to approximately $53,805,000 at September 30, 2008 from $49,831,000 at March 31, 2008 due to the increases in receivables as well as the decrease in accounts payable noted above.

Our future capital requirements will depend on many factors, including the following:

• the success of our clinical studies;

• the scope of and progress made in our research and development activities;

• our ability to acquire additional product candidates;

• the success of any proposed financing efforts; and

• the ability to sustain sales and profits of our commercial products.

Absent acquisitions of additional products, product candidates or intellectual property, we believe our current cash and investment balances are adequate to meet our needs for at least the next twenty four months. Our future capital requirements include, but are not limited to, continued investment in our research and development programs, capital expenditures primarily associated with purchases of equipment and facilities and continued investment in our intellectual property portfolio.

We plan to continue to invest in key research and development activities. We actively evaluate various strategic transactions on an ongoing basis, including licensing or acquiring complementary products, technologies or businesses that would complement our existing portfolio of development programs. We continue to seek to acquire such potential assets that may offer us the best opportunity to create value for our shareholders. In order to acquire such assets, we may need to seek additional financing to fund these investments. This may require the issuance or sale of additional equity or debt securities. The sale of additional equity may result in dilution to our stockholders. Should we need to secure additional financing to acquire a product, fund future investment in research and development, or meet our future liquidity requirements, we may not be able to secure such financing, or obtain such financing on favorable terms because of the volatile nature of the biotechnology marketplace.

Off-Balance Sheet Arrangements

As of September 30, 2008, we did not have any off-balance sheet arrangements.

Commitments

As of September 30, 2008, we had the following fixed obligations and commitments:

                                                    Payments Due by Period
                                             Less than 1     1 - 3    3 - 5     More than 5
  (In thousands)                   Total        Year         Years    Years        Years
  Operating lease obligations     $ 1,974   $         666   $ 1,167   $  141   $          -
  Capital lease obligations (1)        73              44        29       -               -
  Purchase obligations (2)            775             775        -        -               -
  Contractual obligations (3)         376             103       179       75              19

  Total                           $ 3,198   $       1,588   $ 1,375   $  216   $          19

(1) Represents principal payments only; principal and interest are payable through a fixed annual payments of approximately $48,000.

(2) Represents purchase orders for the procurement of raw material for manufacturing as well as clinical materials to support our upcoming trials.

(3) Includes payments for license, supply and consulting agreements.

Cautionary Statement Regarding Forward-Looking Statements

Statements in this Quarterly Report on Form 10-Q, as well as oral statements that may be made by Repligen or by officers, directors or employees of Repligen acting on its behalf, that are not historical facts constitute "forward-looking statements" which are made

pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements in this Quarterly Report on Form 10-Q do not constitute guarantees of future performance. Investors are cautioned that statements in this Quarterly Report on Form 10-Q which are not strictly historical statements, including, without limitation, statements regarding current or future financial performance, management's strategy, litigation strategy, costs of legal proceedings, disputes with suppliers, plans and objectives for future operations, clinical trials and results, marketing plans, revenue potential of therapeutic product candidates, product research, intellectual property and development, manufacturing plans and performance, delays in manufacturing by us or our partners, timing of customer orders, the anticipated growth in our target markets, including, without limitation, the market for neuropsychiatric disorders treatment, the market for pancreatic disease treatment, the monoclonal antibody market and the process chromatography industry and projected growth in product sales, costs of operations, sufficiency of funds to meet management objectives and availability of financing and effects of accounting pronouncements constitute forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause our actual results to be materially different from the historical results or from any results expressed or implied by such forward-looking statements, including, without limitation, risks associated with: the success of current and future collaborative relationships, the success of our clinical trials and our ability to develop and commercialize products, our ability to obtain required regulatory approvals, our compliance with all Food and Drug Administration regulations, our ability to obtain, maintain and protect intellectual property rights for our products, the risk of litigation regarding our patent and other intellectual property rights, the risk of litigation with collaborative partners, our limited sales and marketing experience and capabilities, our limited manufacturing capabilities and our dependence on third-party manufacturers and value-added resellers, our ability to hire and retain skilled personnel, the market acceptance of our products, our ability to compete with larger, better financed pharmaceutical and biotechnology companies that may develop new approaches to the treatment of our targeted diseases, our history of losses and expectation of incurring continued losses, our ability to generate future revenues, our ability to raise additional capital to continue our drug development programs, our volatile stock price, and the effects of our anti-takeover provisions. Further information on potential risk factors that could affect our financial results are included in the filings made by us from time to time with the Securities and Exchange Commission including under the section entitled "Risk Factors" in our Annual Report on Form 10-K for the year ended March 31, 2008.