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RGEN > SEC Filings for RGEN > Form 10-K on 15-Mar-2013All Recent SEC Filings

Show all filings for REPLIGEN CORP | Request a Trial to NEW EDGAR Online Pro

Form 10-K for REPLIGEN CORP


15-Mar-2013

Annual Report


Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Annual Report on Form 10-K contains 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 "Exchange Act"). The forward-looking statements in this Annual Report on Form 10-K do not constitute guarantees of future performance. Investors are cautioned that statements in this Annual Report on Form 10-K that are not strictly historical statements, including, without limitation, statements regarding current or future financial performance, potential impairment of future earnings, management's strategy, plans and objectives for future operations or acquisitions, product development and sales, clinical trials and results, litigation strategy, product candidate research, development and regulatory approval, selling, general and administrative expenditures, intellectual property, development and manufacturing plans, availability of materials and product and adequacy of capital resources and financing plans constitute forward-looking statements. Such forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated, including, without limitation, the risks identified under the caption "Risk Factors" and other risks detailed in this Annual Report on Form 10-K and our other filings with the Securities and Exchange Commission. We assume no obligation to update any forward-looking information contained in this Annual Report on Form 10-K, except as required by law.

Overview

We are a life sciences company that develops, manufactures and markets high-value, consumable bioprocessing products for life sciences companies and biopharmaceutical manufacturing companies worldwide. We are a world-leading manufacturer of both native and recombinant forms of Protein A, critical reagents used in biomanufacturing to separate and purify 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 use in clinical-scale manufacturing. These pre-packed, "plug-and-play" columns are uniquely flexible and customizable to our customers' media and size requirements. We generally manufacture and sell Protein A and growth factors to life sciences companies under long-term supply agreements and sell our chromatography columns, as well as media and quality test kits, directly to biopharmaceutical companies or contract manufacturing organizations. We refer to these activities as our bioprocessing business.

On December, 20, 2011, we significantly increased the size of our bioprocessing business through a strategic acquisition. We acquired certain assets and assumed certain liabilities of Novozymes Biopharma Sweden, AB ("Novozymes") in Lund, Sweden, including the manufacture and supply of cell culture ingredients and Protein A affinity ligands for use in industrial cell culture, stem and therapeutic cell culture and biopharmaceutical manufacturing (the "Novozymes Biopharma Business" and the acquisition of the Novozymes Biopharma Business, the "Novozymes Acquisition") for a total upfront cash payment of 20.65 million Euros (~$26.9 million). As a result of the Novozymes Acquisition, we nearly doubled the size of our bioprocessing business.

Historically, Repligen also conducted activities aimed at developing proprietary therapeutic drug candidates, often with a potential of entering into a collaboration with a larger commercial stage pharmaceutical or biotechnology company in respect of these programs. In addition, we have out-licensed certain intellectual property to Bristol-Myers Squibb Company, or Bristol, from which we receive royalties on Bristol's net sales in the United States of their product Orencia®. As part of our strategic decision in 2012 to focus our efforts on our core bioprocessing business, we scaled back our efforts on our clinical development programs and increased our efforts to find collaboration partners to pursue the development and, if successful, commercialization of these drug programs. The current status of our development portfolio is:

• On December 28, 2012, we out-licensed our SMA program, led by RG3039, to Pfizer Inc., or Pfizer. Pursuant to this license agreement, Pfizer will assume the majority of the costs associated with


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completing the required clinical trials for this program as well as obtaining U.S. Food and Drug Administration ("FDA") approval of the respective new drug application ("NDA"). Under the license agreement, we are obligated to conduct additional activities in support of this program, which will include completing the second cohort of the current Phase I trial and supporting the transition of the program to Pfizer. We expect to complete these activities in the first half of 2013.

• The most advanced product candidate in our development portfolio is RG1068, a synthetic human hormone being developed as a novel imaging agent for the improved detection of pancreatic duct abnormalities in combination with magnetic resonance imaging in patients with pancreatitis and potentially other pancreatic diseases. We submitted an NDA to the FDA and a marketing authorization application ("MAA") to the European Medicines Agency ("EMA") in the first quarter of 2012. In the second quarter of 2012, we received a complete response letter from the FDA, indicating the need for additional clinical efficacy and safety trial data. We are currently working with the FDA on the details of an additional Phase III trial. We believe providing certainty as to the requirements of this additional Phase III trial may be an important factor in the decision by third-parties that may wish to pursue a development or commercialization agreement with us for RG1068.

• Our third clinical development program was targeted at Friedrich's Ataxia and led by RG2833, a class I histone deacetylase ("HDAC") inhibitor. RG2833 has received Orphan Drug designation from the FDA and European Commission. We initiated a single, ascending dose Phase 1 study of RG2833 in Friedreich's Ataxia patients in Italy in the fourth quarter of 2012 and expect to complete this trial in the first half of 2013. We believe the results of this trial may be an important consideration for any third-party that may wish to pursue a development or commercialization agreement with us for RG2833. We expect that any additional development activities that we may pursue in the future will be largely supported by sponsors or collaborators.

• On April 7, 2008, we entered into a settlement agreement with Bristol in connection with a patent infringement lawsuit we filed against Bristol. Under the terms of the agreement, Bristol is obligated to pay us royalties on its U.S. net sales of Orencia® for any clinical indication at a rate of 1.8% for the first $500,000,000 of annual sales, 2.0% for the next $500,000,000 of annual sales and 4% of annual sales in excess of $1 billion. Under the terms of the agreement, we will not receive any future royalties on Bristol's sales of Orencia® made after December 31, 2013.

Total revenue for the fiscal year ended December 31, 2012 increased as compared to the nine-month fiscal year ended December 31, 2011 and is primarily due to the acquisition of the Novozymes business as well as increased royalty revenue from Bristol as their product Orencia® continues to penetrate the market.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

While our significant accounting policies are more fully described in the notes to our financial statements, we have identified the policies and estimates below as being critical to our business operations and the understanding of our results of operations. The impact of and any associated risks related to these policies on our business operations are discussed throughout "Management's Discussion and Analysis of Financial Condition," including in the "Results of Operations" section, where such policies affect our reported and expected financial results.

Revenue recognition

Product Sales

We generate revenue from the sale of products, licensing transactions and research and development collaborations. Our product revenues are from the sale of bioprocessing products to customers in the life science and biopharmaceutical industries. We recognize revenue related to product sales upon delivery of the product to the customer as long as there is persuasive evidence of an arrangement, the sales price is fixed or determinable and collection of the related receivable is reasonably assured. Determination of whether these criteria have been


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met are based on management's judgments primarily regarding the fixed nature of the fee charged for the product delivered and the collectability of those fees. We have a few longstanding customers who comprise the majority of revenue and have excellent payment histories and therefore we do not require collateral. We have had no significant write-offs of uncollectible invoices in the periods presented.

At the time of sale, we also evaluate the need to accrue for warranty and sales returns. The supply agreements we have with our customers and related purchase orders identify the terms and conditions of each sale and the price of the goods ordered. Due to the nature of the sales arrangements, inventory produced for sale is tested for quality specifications prior to shipment. Since the product is manufactured to order and in compliance with required specifications prior to shipment, the likelihood of sales return, warranty or other issues is largely diminished. Sales returns and warranty issues are infrequent and have had nominal impact on our financial statements historically.

Orencia Royalty

In April 2008, we settled our outstanding litigation with Bristol and began recognizing royalty revenue from that settlement 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 settlement with Bristol, we recognized royalty revenue of $14,753,000 for the fiscal year ended December 31, 2012, $8,769,000 for the nine-month fiscal year ended December 31, 2011 and $10,251,000 for the fiscal year ended March 31, 2011. Revenue earned from Bristol royalties is recorded in the periods when it is earned based on royalty reports sent by Bristol to us. We have no continuing obligations to Bristol as a result of this settlement. Our royalty agreement with Bristol provides that we will receive such royalty payments on sales of Orencia® by Bristol through December 31, 2013.

Pfizer License Agreement

In December 2012, we entered into an exclusive worldwide licensing agreement (the "License Agreement") with Pfizer to advance the SMA program, which is led by RG3039 and also includes backup compounds and enabling technologies. Pursuant to the terms of the License Agreement, we received $5 million from Pfizer as an upfront payment on January 22, 2013 and are entitled to receive up to $65 million in potential future payments, a portion of which may be owed to third parties. These potential payments are approximately equally divided between milestones related to clinical development and initial commercial sales in specific geographies. In addition, we are entitled to receive royalties on any future sales of RG3039 or any SMA compounds developed under the License Agreement. The royalty rates are tiered and begin in the high single-digits for RG-3039 or lesser amounts for any backup compounds developed under the License Agreement. Our receipt of these royalties is subject to an obligation under an existing in-license agreement and other customary offsets and deductions. There are no refund provisions in this agreement.

Activities under this agreement were evaluated in accordance with ASC 605-25 to determine if they represented a multiple element revenue arrangement. We identified the following deliverables in the Pfizer agreement:

• An exclusive license to research, develop, manufacture, commercialize and use RG3039 and backup compounds for the treatment of SMA and other disorders (the "License");

• Research and development services designed to transition the SMA program to Pfizer pursuant to a transition plan (the "Transition Services") ;

• The completion of the second cohort of a phase I clinical trial that was underway at the time the License Agreement was signed; and

• An inventory of RG3039, that could be used in clinical development, specifically to complete the phase I clinical trial, referenced immediately above (the "Clinical Trial Material").

Two criteria must be met in order for a deliverable to be considered a separate unit of accounting. The first criterion requires that the delivered item or items have value to the customer on a stand-alone basis. The second


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criterion, which relates to evaluating a general right of return, is not applicable because such a provision does not exist in the License Agreement. The deliverables outlined above were deemed to have stand-alone value and to meet the criteria to be accounted for as separate units of accounting. Factors considered in this determination included, among other things, whether any other vendors sell the items separately and if Pfizer could use the delivered item for its intended purpose without the receipt of the remaining deliverables. If multiple deliverables included in an arrangement are separable into different units of accounting, the multiple-element arrangements guidance addresses how to allocate the arrangement consideration to those units of accounting. The amount of allocable arrangement consideration is limited to amounts that are fixed or determinable. Arrangement consideration is allocated at the inception of the arrangement to the identified units of accounting based on their relative selling price.

We identified the arrangement consideration to allocate among the units of accounting as the $5.0 million non-refundable up-front payment and excluded the potential milestone payments provided for in the License Agreement from the arrangement consideration as they were not considered fixed or determinable at the time the License Agreement was signed. Because we had not sold these items on a standalone basis previously, we had no vendor-specific objective evidence of selling price. Furthermore, we did not have detailed third-party evidence of selling price, and as a result we used our best estimate of selling price for each item. In determining these prices, we considered what we would be willing to sell the items for on a standalone basis, what the market would bear for such items and what another party might charge for these items.

The up-front arrangement consideration allocated to the License was recognized upon delivery of the License as the risks and rewards associated with the License transferred at that time. We used a discounted cash flow analysis to determine the value of the license. Key assumptions in the analysis included:
the estimated market size for a compound targeted at SMA, the estimated remaining costs of development and time to commercialization, and the probability of successfully developing and commercializing the program. Based on this analysis, we allocated $4,876,000 to the value of the license and recognized this amount as revenue in the fiscal year ended December 31, 2012.

The remaining $124,000 of value was allocated based on the following:

• The estimated selling price of the Transition Services was approximately $600,000 resulting in consideration allocation of approximately $76,000. We were able to derive a price for these services, in part because they are similar to services provided by a contract research organization. We based the selling price of the Transition Services on internal full-time equivalent personnel costs and external costs that we expect to incur to transition the program to Pfizer. We applied a mark-up on the internal full-time equivalent personnel costs consistent with that of contract research organizations.

• The estimated selling price of the completion of the second cohort of the clinical trial was approximately $275,000 resulting in consideration allocation of approximately $35,000. This estimated selling price is based on the estimated, remaining costs to complete this cohort. Since the costs are pursuant to an arrangement negotiated with a third-party clinical site, we believe that the external cost estimate included in the agreement represents the best estimate of selling price for this unit of accounting.

• The estimated selling price of the Clinical Trial Material was approximately $105,000 resulting in consideration allocation of approximately $13,000. The estimated selling price is based upon the cost of procuring such material from the contract manufacturing organization that made the material. Since these costs were incurred pursuant to an arrangement negotiated with a third-party contract manufacturing organization, we believes that the costs included in the agreement represents the best estimate of selling price for this unit of accounting.

We believe that a change in the key assumptions used to determine best estimate of selling price for each of the deliverables would not have a significant effect on the allocation of arrangement consideration.


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We intend to recognize the revenues related to the transfer of Clinical Trial Material upon transfer of title and risk of loss to Pfizer, which we expect to occur in the first half of 2013. We expect to recognize revenues related to the Transition Services and the completion of the second cohort ratably over the first six months of 2013.

Future milestone payments, if any, under the License Agreement will be recognized under the provisions of ASC 605-28, which was adopted by Repligen on January 1, 2011. ASC 605-28 allows an entity to make an accounting policy election to recognize a payment that is contingent upon the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. A milestone is considered an event if:

• It can only be achieved based in whole or in part on either (1) the Company's performance or (2) on the occurrence of a specific outcome resulting from the Company's performance;

• There is substantive uncertainty at the date an arrangement is entered into that the event will be achieved; and

• It would result in additional payments being due to the entity.

In addition to the $5 million up-front payment, we are also eligible to receive $65 million in potential milestone payments from Pfizer comprised of:

• Up to $30 million related to the achievement of specified clinical milestone events; and

• Up to $35 million related to the achievement of specified commercial sales events, specifically the first commercial sale in specific territories.

We believe that the $30 million of specified clinical milestone payments are substantive. We may receive all, or a portion of, the first clinical milestone of $2 million in 2013 depending upon the development path chosen by Pfizer. If we receive a portion of this milestone, we expect to receive the balance of it by the end of 2014.

Any milestones earned upon specified commercial sales events or future royalty payments, under the License Agreement will be recognized as revenue when they are earned.

Research and Development Agreements

In the fiscal year ended December 31, 2012, we also recognized $803,000 of revenue from sponsored research and development projects under agreements with the National Institutes of Health / Scripps Research Institute, the European Friedrich's Ataxia Consortium for Translational Studies, GoFar, and the Friedreich's Ataxia Research Alliance. For the nine-month fiscal year ended December 31, 2011, we recognized approximately $1,466,000 of revenue from sponsored research and development projects under agreements with the Muscular Dystrophy Association, the National Institutes of Health / Scripps Research Institute, the European Friedrich's Ataxia Consortium for Translational Studies, Go Friedreich's Ataxia Research ("GoFar"), and the Friedreich's Ataxia Research Alliance. For the nine months ended December 31, 2010, we recognized $1,102,000 of revenue from sponsored research and development projects under agreements with the Muscular Dystrophy Association, the National Institutes of Health / Scripps Research Institute, GoFar, and the Friedreich's Ataxia Research Alliance. During the fiscal year ended March 31, 2011, we recognized approximately $1,346,000 of revenue from sponsored research and development projects under agreements with the Muscular Dystrophy Association, the National Institutes of Health / Scripps Research Institute, GoFar, and the Friedreich's Ataxia Research Alliance. In the fiscal year ended March 31, 2011, we also recognized approximately $733,000 in one-time grants under the Qualifying Therapeutic Discovery Project Program, which was created in March 2010 as part of the Patient Protection and Affordability Care Act.

Research revenue is recognized when the expense has been incurred and services have been performed. Determination of which incurred costs qualify for reimbursement under the terms of our contractual agreements


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and the timing of when such costs were incurred involves the judgment of management. Our calculations are based upon the agreed-upon terms as stated in the arrangements. However, should the estimated calculations change or be challenged by other parties to the agreements, research revenue may be adjusted in subsequent periods. The calculations have not historically changed or been challenged, and we do not anticipate any significant subsequent change in revenue related to sponsored research and development projects.

There have been no material changes to our initial estimates related to revenue recognition in any periods presented in the accompanying consolidated financial statements.

Inventories

Inventories relate to our bioprocessing business. We value inventory at cost or, if lower, fair market value, using the first-in, first-out method. We review our inventory at least quarterly and record a provision for excess and obsolete inventory based on our estimates of expected sales volume, production capacity and expiration dates of raw materials, work-in-process and finished products. Expected sales volumes are determined based on supply forecasts provided by key customers for the next three to 12 months. We write down inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable value, and inventory in excess of expected requirements to cost of product revenue. Manufacturing of bioprocessing finished goods is done to order and tested for quality specifications prior to shipment.

A change in the estimated timing or amount of demand for our products could result in additional provisions for excess inventory quantities on hand. Any significant unanticipated changes in demand or unexpected quality failures could have a significant impact on the value of inventory and reported operating results. During all periods presented in the accompanying consolidated financial statements, there have been no material adjustments related to a revised estimate of inventory valuations.

Business combinations

Amounts paid for acquisitions are allocated to the assets acquired and liabilities assumed, if any, based on their fair values at the dates of acquisition. The fair value of identifiable intangible assets is based on detailed valuations that use information and assumptions determined by management. Any excess of purchase price over the fair value of the net tangible and intangible assets acquired is allocated to goodwill. The fair value of contingent consideration includes estimates and judgments made by management regarding the probability that future contingent payments will be made, the extent of royalties to be earned in excess of the defined minimum royalties, etc. Management updates these estimates and the related fair value of contingent consideration at each reporting period. Changes in the fair value of contingent consideration are recorded in our Statement of Operations.

We use the income approach to determine the fair value of certain identifiable intangible assets including customer relationships and developed technology. This approach determines fair value by estimating after-tax cash flows attributable to these assets over their respective useful lives and then discounting these after-tax cash flows back to a present value. We base our assumptions on estimates of future cash flows, expected growth rates, expected trends in technology, etc. We base the discount rates used to arrive at a present value as of the date of acquisition on the time value of money and certain industry-specific risk factors. We believe the estimated purchased customer relationships and developed technology amounts so determined represent the fair value at the date of acquisition and do not exceed the amount a third party would pay for the assets.

Intangible assets and goodwill

Intangible Assets

We amortize our intangible assets that have finite lives using the straight-line method. Amortization is recorded over the estimated useful lives ranging from 8 to 8.5 years. We review our intangible assets subject to


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amortization to determine if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment or a change in the remaining useful life. If the carrying value of an asset exceeds its undiscounted cash flows, we will write-down the carrying value of the intangible asset to its fair value in the period identified. In assessing fair value, we must make assumptions regarding estimated future cash flows and discount rates. If these estimates or related assumptions change in the future, we may be required to record impairment charges. We generally calculate fair value as the present value of estimated future cash flows to be generated by the asset using a risk-adjusted discount rate. If the estimate of an intangible asset's remaining useful life is changed, we will amortize the remaining carrying value of the intangible asset prospectively over the revised remaining useful life.

Goodwill

We test goodwill for impairment on an annual basis and between annual tests if events and circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying value. Events that would indicate impairment and trigger an interim impairment assessment include, but are not limited to current economic and market conditions, including a decline in market capitalization, a significant adverse change in legal factors, business climate or operational performance of the business, and an adverse action or assessment by a regulator. Our annual impairment test date is the last day of our fiscal fourth quarter. For the fiscal year ended December 31, 2012, the impairment test date was December 31, 2012.

Accrued liabilities

We estimate accrued liabilities by identifying services performed on our behalf, . . .

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