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RGEN > SEC Filings for RGEN > Form 10-Q on 8-Nov-2012All Recent SEC Filings

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Form 10-Q for REPLIGEN CORP


8-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We are a life sciences company that develops, manufactures and markets bioprocessing products for life sciences and biopharmaceutical manufacturing customers worldwide. In December 2011, we acquired certain assets and assumed certain liabilities of Novozymes Biopharma Sweden, AB thereby diversifying and expanding our bioprocessing product offering and customer base, as well as doubling our manufacturing capacity. We are a world-leading manufacturer of both native and recombinant forms of Protein A, critical reagents used in the manufacture of monoclonal antibodies, a type of biologic drug. We also supply several growth factor products used to increase cell culture productivity during the biomanufacturing process. In the burgeoning area of disposable biomanufacturing technologies, we have developed and currently market a series of OPUS™ (Open-Platform, User-Specified) chromatography columns for clinical-stage manufacturing. These pre-packed "plug-and-play" columns are uniquely flexible and customizable to our customers' media and size requirements.

We also applied our expertise in biologic product development to RG1068, a synthetic version of the human hormone secretin that was being developed by the Company as a novel imaging agent for use in combination with magnetic resonance imaging ("MRI") to improve the detection of pancreatic duct abnormalities in patients with pancreatitis. We previously submitted a new drug application ("NDA") for RG1068 to the U.S. Food and Drug Administration ("FDA") and a marketing authorization application ("MAA") to the European Medicines Agency ("EMA"). We received a complete response letter ("CRL") in June 2012 from the FDA requesting additional clinical efficacy and safety trial data to support potential approval of the NDA. While we believe RG1068 addresses an area of significant unmet medical need in the detection of pancreatic abnormalities, consistent with our decision to focus our internal efforts on our core bioprocessing business, the Company is currently seeking development and commercialization partners for RG1068. In conjunction with this decision, we are discontinuing active prosecution of our NDA and MAA for RG1068.

We also have two early stage central nervous system ("CNS") rare disease programs that are advancing through Phase 1 clinical trials in Friedreich's ataxia and spinal muscular atrophy. As a result of our decision to focus on the growth of the Company's core bioprocessing business, we are seeking development and commercialization partnerships for these programs.

In addition, we have out-licensed certain intellectual property from which we receive royalties from Bristol-Myers Squibb Company ("Bristol") on their net sales in the U.S. of their product Orencia®. We expect to receive these royalty payments for Bristol's sales through December 31, 2013.

Total revenue for the nine months ended September 30, 2012 increased by 96% as compared to the nine months ended September 30, 2011 and is primarily due to the addition of the Novozymes Biopharma Business, an increase in bioprocessing product sales orders from a large customer and increased royalty revenue from Bristol as their product Orencia® continues to penetrate the market. In connection with our decision to focus on the growth of the Company's core bioprocessing business, our research and development expenses will likely decline in the future.

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


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effect of matters that are inherently uncertain. For additional information, please see the discussion of our critical accounting policies in Management's Discussion and Analysis and our significant accounting policies in Note 2 to the Financial Statements included in our Transition Report on Form 10-K for the nine months ended December 31, 2011. There have been no changes to our critical accounting policies since December 31, 2011.

Results of Operations

Three months ended September 30, 2012 vs. September 30, 2011

Total revenue

Total revenues for the three-month periods ended September 30, 2012 and 2011 were approximately $15,104,000 and $8,631,000, respectively, an increase of $6,473,000 or 75%.

Sales of bioprocessing products for the three months ended September 30, 2012 and 2011 were $11,123,000 and $5,742,000, respectively, an increase of $5,381,000, or 94%. This increase is primarily due to the addition of the Novozymes Biopharma Business. A majority of the bioprocessing products that we manufacture are based on recombinant Protein A and are sold to customers who incorporate these 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 and a variety of cancers. Sales of the bioprocessing products we manufacture are therefore impacted by the timing of large-scale production orders and the regulatory approvals for such antibodies, which may result in significant quarterly fluctuations. Such quarterly fluctuations are expected but they may not be predictive of future revenue or otherwise indicate a trend.

Pursuant to the Bristol Settlement, we recognized royalty revenue of approximately $3,963,000 and $2,789,000 for the three months ended September 30, 2012 and 2011, respectively. We expect to receive these royalty payments for Bristol's sales through December 31, 2013.

For the three months ended September 30, 2012 and 2011, we recognized approximately $18,000 and $100,000, respectively, of revenue from sponsored research and development projects under agreements with the European Friedrich's Ataxia Consortium for Translational Studies and Go Friedreich's Ataxia Research.

Costs and operating expenses

Total costs and operating expenses were approximately $12,917,000 and $8,079,000 for the three-month periods ended September 30, 2012 and 2011, respectively, an increase of $4,838,000 or 60%.

Cost of product revenue was approximately $6,419,000 and $2,093,000 for the three-month periods ended September 30, 2012 and 2011, respectively, an increase of $4,326,000 or 207%. This increase is primarily due to the addition of the Novozymes Biopharma Business and related product mix and other individually insignificant manufacturing variances. While we have reduced headcount and related costs at Repligen Sweden, we anticipate that gross margins will be lower in the twelve-month period ending December 31, 2012 as compared to the same period in 2011 because a significant percentage of our bioprocessing products are now manufactured in our facility in Sweden which has a higher cost of product revenue.

Pursuant to the Bristol Settlement, we must remit 15% of royalty revenue received through the expiration of the settlement agreement in December 2013 to the University of Michigan. For the three-month periods ended September 30, 2012 and 2011, the cost of royalty revenue was approximately $594,000 and $418,000, respectively. This increase is due to the increase in Bristol royalty revenue noted above.

Research and development expenses were approximately $2,433,000 and $3,075,000 for the three-month periods ended September 30, 2012 and 2011, respectively, a decrease of $642,000 or 21%. This decrease is attributable to reduced spending on our drug development programs as we focus our efforts on our core bioprocessing business.

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. Many resources including personnel, supplies and equipment are shared by all of the development programs. As a result, and due to the significant risks and uncertainties in drug development, we are not able to provide cumulative spending to date or predict total development costs for any particular program. We expect that future research and development costs related to our therapeutic programs will be limited to those intended to most directly add value to potential development and commercialization partnering opportunities. These costs may vary depending on the timing of when each program can be partnered to an outside party, if at all, and any development work that we continue under any such arrangement. In the future, we expect research and development expenses to be lower as we primarily focus on product development to support our bioprocessing business.


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Selling, general and administrative expenses were approximately $3,126,000 and $2,493,000 for the three-month periods ended September 30, 2012 and 2011, respectively, an increase of $633,000 or 25%. This increase is primarily attributable to a $312,000 increase related to the addition of the Novozymes Biopharma Business, a $185,000 increase in professional fees as a result of the acquisition and a $104,000 increase in recruiting fees related to the hiring of our new Chief Financial Officer. For the remaining quarter in 2012, we expect selling, general and administrative expenses to be consistent with the quarter ended September 30, 2012 as we reduce certain RG1068 pre-commercialization activities and focus on finding a development or commercialization partner for the program.

In connection with the addition of the Novozymes Biopharma Business and the acquisition of the assets of BioFlash, we may be required to pay future consideration that is contingent on achieving certain revenue and technology transfer based milestones. As of each respective acquisition date, we recorded contingent consideration liabilities for the estimated fair value of the amount we expect to pay to the former shareholders of each acquired business. This liability is based on future revenue projections of the respective businesses under various potential scenarios and weighted probability assumptions of these outcomes. At each reporting period, we re-measure the fair value of these liabilities and record the changes in fair value through a separate line item, "contingent consideration - fair value adjustments", within our Condensed Consolidated Statements of Comprehensive Income (Loss). Increases or decreases in the fair value of contingent consideration liabilities can result from accretion of the liability in connection with the passage of time, changes in discount rates, and changes in the timing, probabilities and amount of revenue estimates. For the three-month period ended September 30, 2012, we recorded a charge of approximately $344,000 primarily reflecting an increase in the fair value of the liability related to the addition of the Novozymes Biopharma Business.

Investment income

Investment income includes income earned on invested cash balances. Investment income was approximately $96,000 and $52,000 for the three-month periods ended September 30, 2012 and 2011, respectively. This increase of $44,000, or 85%, is primarily attributable to higher interest income on cash balances in Sweden partially offset by lower interest earned on our investment portfolio due to lower interest rates and a lower average investment balance during the period.

Other income (expense)

Other expense was approximately $500,000 for the three-month period ended September 30, 2012 and is primarily attributable to the impact of movements in exchange rates on foreign currency denominated revenues and expenses.

Provision for income taxes

For the three-month period ended September 30, 2012, we had income before taxes of approximately $1,790,000 and a tax benefit of $16,000 based on an effective tax rate of 5.17%. For the three-month period ended September 30, 2011, we did not record a tax provision as the effective income tax rate was 0%. The effective income tax rate is based upon the estimated income for the year and the composition of the income in different jurisdictions. The effective tax rate differs from the statutory tax rate primarily due to the utilization of prior year net operating loss carryforwards and credits.

Nine months ended September 30, 2012 vs. September 30, 2011

Total revenue

Total revenues for the nine-month periods ended September 30, 2012 and 2011 were approximately $43,453,000 and $22,191,000 respectively, an increase of $21,262,000 or 96%.

Sales of bioprocessing products for the nine-month periods ended September 30, 2012 and 2011 were approximately $32,125,000 and $13,251,000, respectively, an increase of $18,874,000, or 142%. This increase is primarily due to the addition of the Novozymes Biopharma Business and an increase in bioprocessing product sales orders from a large customer. A majority of the bioprocessing products that we manufacture are based on recombinant Protein A and are sold to customers who incorporate these 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 and a variety of cancers. Sales of our bioprocessing products are therefore impacted by the timing of large-scale production orders and the regulatory approvals for such antibodies, which may result in significant quarterly fluctuations in product revenue. Such quarterly fluctuations are expected but they may not be predictive of future revenue or otherwise indicate a trend.

Pursuant to the Bristol Settlement, we recognized royalty revenue of approximately $10,623,000 and $8,075,000 for the nine-month periods ended September 30, 2012 and 2011, respectively. We expect to receive these royalty payments for Bristol's sales through December 31, 2013.

For the nine months ended September 30, 2012 and 2011, we recognized approximately $704,000 and $866,000, respectively, of revenue from sponsored research and development projects under agreements with the Muscular Dystrophy Association, the European Friedrich's Ataxia Consortium for Translational Studies, the National Institutes of Health / Scripps Research Institute, Go Friedreich's Ataxia Research, and the Friedreich's Ataxia Research Alliance.


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Costs and operating expenses

Total costs and operating expenses were approximately $38,780,000 and $23,847,000 for the nine-month periods ended September 30, 2012 and 2011, respectively, an increase of $14,933,000 or 63%.

Cost of product revenue was approximately $19,037,000 and $5,039,000 for the nine-month periods ended September 30, 2012 and 2011, respectively, an increase of $13,998,000 or 278%. This increase is primarily due to the addition of the Novozymes Biopharma Business and related product mix, the increase in bioprocessing product sales noted above and other individually insignificant manufacturing variances. While we have reduced headcount and related costs in Sweden, we anticipate that gross margins will be lower in the twelve-month period ending December 31, 2012 as compared to the same period in 2011 because a significant percentage of our bioprocessing products are now manufactured in our facility in Sweden which has a higher cost of product revenue.

Pursuant to the Bristol Settlement, we must remit 15% of royalty revenue received through the expiration of the settlement agreement in December 2013 to the University of Michigan. For the nine-month periods ended September 30, 2012 and 2011, the cost of royalty revenue was approximately $1,593,000 and $1,211,000, respectively.

Research and development expenses were approximately $8,147,000 and $10,376,000 for the nine-month periods ended September 30, 2012 and 2011, respectively, a decrease of $2,229,000 or 21%. This decrease is attributable to reduced spending on our drug development programs as we focus our efforts on our core bioprocessing business.

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. Many resources including personnel, supplies and equipment are shared by all of the development programs. As a result, and due to the significant risks and uncertainties in drug development, we are not able to provide cumulative spending to date or predict total development costs for any particular program. We expect that future research and development costs will be limited to those intended to most directly add value to potential development and commercialization partnering opportunities. These costs may vary depending on the timing of when each program can be partnered to an outside party, if at all, and any development work that we continue under any such arrangement. In connection with our decision to focus on the growth of the Company's core bioprocessing business, our research and development expenses will likely decline in the future.

Selling, general and administrative expenses were approximately $9,973,000 and $7,221,000 for the nine-month periods ended September 30, 2012 and 2011, respectively, an increase of $2,752,000 or 38%. This increase is largely attributable to increased headcount and transaction costs associated with the addition of the Novozymes Biopharma Business, as well as increased commercialization expenditures prior to receipt of the CRL from the FDA for RG1068 and increased sales and marketing activities related to our decision to focus our internal efforts on our bioprocessing business.

In connection with the addition of the Novozymes Biopharma Business and the acquisition of the assets of BioFlash, we may be required to pay future consideration that is contingent on achieving certain revenue and technology transfer based milestones. As of each respective acquisition date, we recorded contingent consideration liabilities for the estimated fair value of the amount we expect to pay to the former shareholders of each acquired business. This liability is based on future revenue projections of the respective businesses under various potential scenarios and weighted probability assumptions of these outcomes. At each reporting period, we re-measure the fair value of these liabilities and record the changes in fair value through a separate line item, "contingent consideration - fair value adjustments", within our Condensed Consolidated Statements of Comprehensive Income (Loss). Increases or decreases in the fair value of contingent consideration liabilities can result from accretion of the liability in connection with the passage of time, changes in discount rates, and changes in the timing, probabilities and amount of revenue estimates. For the nine-month period ended September 30, 2012, we recorded a charge of approximately $344,000 primarily reflecting an increase in the fair value of the Novozymes liability.

For the nine months ended September 30, 2012, we recorded a $314,000 gain on bargain purchase associated with a working capital adjustment related to the Novozymes Acquisition.

Investment income

Investment income includes income earned on invested cash balances. Investment income was approximately $157,000 and $187,000 for the nine-month periods ended September 30, 2012 and 2011, respectively. This decrease of $30,000, or 16%, is primarily attributable to lower interest earned on our investment portfolio due to lower interest rates and a lower average investment balance during the period partially offset by higher interest income on cash balances in Sweden.


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Other income (expense)

Other income was approximately $67,000 for the nine-month period ended September 30, 2012 and is primarily attributable to the impact of movements in exchange rates on foreign currency denominated revenues and expenses.

Provision for income taxes

For the nine-month period ended September 30, 2012, we had income before taxes of approximately $4,854,000 and a tax provision of $251,000, based on an effective tax rate of 5.17%. For the nine-month period ended September 30, 2011, we did not record a tax provision as no taxable income was generated in the period. The effective income tax rate is based upon the estimated income for the year and the composition of the income in different jurisdictions. The effective tax rate differs from the statutory tax rate primarily due to the utilization of prior year net operating loss carryforwards and credits.

Liquidity and capital resources

We have financed our operations primarily through sales of equity securities, revenues derived from product sales, and research grants, as well as proceeds and royalties from litigation settlements. Our revenue for the foreseeable future will be limited to our bioprocessing product revenue, royalties from Bristol's sales of Orencia® through December 31, 2013, and research and development grants. We are currently seeking development and commercialization partners for RG1068 and our two early stage CNS programs. However, given the uncertainties related to our ability to negotiate and consummate development and commercialization partnerships for our portfolio of therapeutic and diagnostic assets on acceptable terms, if at all, and the delayed or contingent nature of most or all payments in typical partnership arrangements, we are currently unable to reliably estimate when, if ever, our therapeutic product candidates will generate revenue and cash flows.

Total cash and marketable securities at September 30, 2012 were approximately $42,725,000, an increase of $6,700,000 from $36,025,000 at December 31, 2011. A deposit for leased office space of $200,000 is classified as restricted cash and is not included in the cash and marketable securities totals for September 30, 2012 or December 31, 2011.

Operating activities

For the nine-month period ended September 30, 2012, our operating activities provided cash of $6,210,000 reflecting net income of $4,603,000 and non-cash charges totaling $3,362,000 including depreciation, amortization, stock-based compensation charges, fair value adjustments to contingent consideration and the gain on bargain purchase. The remaining cash flow used in operations resulted from net unfavorable changes in various working capital accounts.

For the nine-month period ended September 30, 2011, our operating activities consumed cash of $1,118,000 reflecting a net loss of $1,482,000 and non-cash charges totaling $1,994,000 including depreciation, amortization, and stock-based compensation charges. The remaining cash flow used in operations resulted from net unfavorable changes in various working capital accounts.

Investing activities

We place our marketable security investments in high quality credit instruments as specified in our investment policy guidelines. Our investing activities consumed $299,000 for the nine-month period ended September 30, 2012, primarily due to $825,000 used for fixed asset additions partially offset by net redemptions of marketable debt securities. For the nine-month period ended September 30, 2011, our investing activities provided $2,174,000, primarily due to net redemptions of marketable debt securities and $545,000 used for fixed asset additions.

Financing activities

Exercises of stock options provided cash proceeds of $887,000 in the nine-month period ended September 30, 2012. In the nine months ended September 30, 2011, exercises of stock options provided $69,000 of cash and we used $419,000 to repurchase shares of our common stock.

We do not currently use derivative financial instruments.

Working capital increased by approximately $5,326,000 to $44,757,000 at September 30, 2012 from $39,431,000 at December 31, 2011 due to the various changes noted above.

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

• the expansion of our bioprocessing business;

• the ability to sustain sales and profits of our bioprocessing products;

• the resources required to successfully integrate the Novozymes Biopharma Business and recognize expected synergies;


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• our ability to establish one or more partnerships for development and commercialization of RG1068 or our early stage CNS programs;

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

• the success of our clinical studies;

• FDA requirements for additional clinical efficacy and safety trial data to support the NDA for RG1068 and the impact of any additional clinical trials on the timeline for commercialization of RG1068;

• our ability to acquire additional bioprocessing products or product candidates;

• the extent of any share repurchase activity;

• the success of any proposed financing efforts; and

• the amount of royalty revenues we receive from Bristol through December 31, 2013.

Absent acquisitions of additional products, product candidates or intellectual property, we believe our current cash balances are adequate to meet our cash needs for at least the next 24 months. We expect to incur moderately lower expenses in the year ending December 31, 2012 as compared to our annualized spending in the nine months ended December 31, 2011, as we reduce certain RG1068 pre-commercialization activities and focus on finding development or commercialization partners for RG1068 and our early stage CNS programs. We expect to incur continued spending related to the development and expansion of our bioprocessing product lines for the foreseeable future. Our future capital requirements may include, but are not limited to, continued investment in our research and development programs, the acquisition of additional bioprocessing products and technologies to complement our existing manufacturing capabilities, capital expenditures primarily associated with purchases of equipment and continued investment in our intellectual property portfolio.

We plan to continue to invest in our bioprocessing business and in key research and development activities associated with our efforts to identify and consummate development and commercialization partnerships. We actively evaluate various strategic transactions on an ongoing basis, including monetizing existing assets and 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 additional 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

We did not have any special purpose entities or off-balance sheet financing arrangements as of September 30, 2012.

Contractual obligations

As of September 30, 2012, we had the following fixed obligations and commitments:

                                                               Payments Due by Period
                                                      Less than 1       1 - 3       3 - 5       More than 5
. . .
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