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RGEN > SEC Filings for RGEN > Form 10-Q on 7-May-2013All Recent SEC Filings

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Form 10-Q for REPLIGEN CORP


7-May-2013

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 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, the 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 the license agreement, Pfizer will assume the majority of the costs associated with 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 includes completing the second cohort of the current Phase I trial for RG3039 and supporting the transition of the program to Pfizer. We completed this second cohort during the quarter ended March 31, 2013 and expect to complete these transition 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 registration study. We believe providing certainty as to the requirements of this additional registration study 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. We expect that any additional development activities that we may pursue in the future will be largely supported by sponsors or collaborators.

• 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 completed the patient dosing in the quarter ended March 31, 2013. We believe the results of this trial, which we are currently analyzing, 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


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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.

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 critical accounting policies in Management's Discussion and Analysis and our significant accounting policies in Note 2 to the Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2012. There have been no changes to our critical accounting policies since December 31, 2012.

Results of Operations

Three months ended March 31, 2013 vs. March 31, 2012

Revenues

Total revenues for the three-month periods ended March 31, 2013 and 2012 were comprised of the following:

                                         Three months ended
                                              March 31,               % Change
                                          2013          2012        2013 vs. 2012
                                           (in thousands, except percentages)
       Bioprocessing product revenue   $   11,934     $  9,343                  28 %
       Royalty and other revenue            4,522        3,482                  30 %

       Total revenue                   $   16,456     $ 12,824                  28 %

Sales of bioprocessing products for the three months ended March 31, 2013 and 2012 were $11,934,000 and $9,343,000, respectively, an increase of $2,591,000, or 28%. This increase was primarily due to increases in orders from our key bioprocessing customers. Sales of our bioprocessing products can be impacted by the timing of orders, development efforts at our customers or end-users and regulatory approvals for biologics that incorporate our products, 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 settlement with Bristol, we recognized royalty revenue of $3,846,000 and $3,081,000 for the three months ended March 31, 2013 and 2012, respectively. We expect to receive these royalty payments for Bristol's sales through December 31, 2013.

For the three months ended March 31, 2013 and 2012, we recognized $621,000 and $401,000, respectively, of revenue from sponsored research and development projects under agreements with the National Institutes of Health / Scripps Research Institute and Go Friedreich's Ataxia Research ("GoFar").

We recognized $55,000 of revenue from the upfront payment under the Pfizer License Agreement in the three months ended March 31, 2013.

Costs and operating expenses

Total costs and operating expenses for the three-month periods ended March 31, 2013 and 2012 were comprised of the following:

                                                         Three months ended
                                                              March 31,                   % Change
                                                        2013             2012           2013 vs. 2012
                                                             (in thousands, except percentages)
Cost of product revenue                               $   6,897        $  5,273                     31 %
Cost of royalty revenue                                     577             462                     25 %
Research and development                                  2,183           2,808                     22 %
Selling, general and administrative                       3,308           3,429                      4 %
Contingent consideration - fair value adjustments           (54 )            -                    -100 %
Gain on bargain purchase                                     -             (314 )                  100 %

Total costs and operating expenses                    $  12,911        $ 11,658                     11 %


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Cost of product revenue was approximately $6,897,000 and $5,273,000 for the three-month periods ended March 31, 2013 and 2012, respectively, an increase of $1,624,000 or 31%. This increase is primarily due to the increase in bioprocessing product sales noted above, the sale of higher cost bioprocessing material manufactured in 2012 at our facility in Sweden, the mix of products sold, normal variations in manufacturing yield and other individually insignificant manufacturing variances. We anticipate that, among other factors, the efficiencies we have implemented at our Swedish manufacturing facility will lead to an overall improvement in our gross margin for the remainder of 2013.

Pursuant to the settlement with Bristol, 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 March 31, 2013 and 2012, the cost of royalty revenue was approximately $577,000 and $462,000, respectively. This increase is directly related to the increase in Bristol royalty revenues noted above.

Research and development expenses were approximately $2,183,000 and $2,808,000 for the three-month periods ended March 31, 2013 and 2012, respectively, a decrease of $625,000 or 22%. This decrease is primarily attributable to a $658,000 reduction in costs related to RG1068 which was undergoing an FDA review during the first quarter of last year, a $563,000 decrease related to our Friedreich's ataxia program as we incurred higher costs in the prior period from clinical trial and related costs, and a $110,000 increase in costs related to RG3039 due an ongoing clinical trial and expenses related to transitioning the program to Pfizer, partially offset by an increase of $112,000 related to bioprocessing R&D.

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. In August 2012, we announced a strategic focus on our Bioprocessing business and a simultaneous effort to find partners, out-licensing opportunities or other funding arrangements with external parties to reduce or eliminate the net expenditures on research and development activities for our therapeutic programs. For each of the remaining quarters in 2013, we expect total research and development expenses to be lower than the quarter ended March 31, 2013. We expect that any research and development activities that we undertake in the future with respect to our therapeutic drug candidates will be limited to those which could support the transition of development and commercialization activities for these programs to potential collaborators. We intend to focus the majority of our future research and development efforts on developing new bioprocessing products.

Selling, general and administrative expenses were approximately $3,308,000 and $3,429,000 for the three-month periods ended March 31, 2013 and 2012, respectively, a decrease of $121,000, or 4%. This decrease is primarily attributable to a $372,000 decrease in external audit and legal fees and a $182,000 reduction in sales and marketing expenses for Secretin, a product which we are no longer actively commercializing. These reductions were partially offset by an increase in $377,000 in compensation and consulting costs related to our bioprocessing business. For each of the remaining quarters in 2013, we expect selling, general and administrative expenses to be moderately lower than the quarter ended March 31, 2013.

For the three months ended March 31, 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 $62,000 and $31,000 for the three-month periods ended March 31, 2013 and 2012, respectively. This increase of $31,000, or 100%, is primarily attributable to slightly higher interest rates.

Provision for income taxes

For the three months ended March 31, 2013, we had income before taxes of approximately $3,622,000 and a tax provision of $1,284,000 for an effective tax rate of approximately 35.45%. This is based on an expected effective tax rate of 28.21% for the year ending December 31, 2013 plus approximately $298,000 of discrete items recognized in the quarter ended March 31, 2013. The effective income tax rate is based upon the estimated income for the year and the composition of the income in different tax jurisdictions. Effective January 1, 2013, Sweden's statutory tax rate decreased from 26.3% to 22.0%. The effective tax rate differs from the statutory tax rate primarily due to the utilization of prior year net operating loss carryforwards and credits.


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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 license arrangements and a litigation settlement. 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. 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 will not receive royalty payments for Bristol's sales of Orencia ® after December 31, 2013 and, as a result, we may need to use our existing capital resources to fund a portion of our operating activities.

At March 31, 2013, we had cash and marketable securities of $54,055,000 compared to $49,970,000 at December 31, 2012. A deposit for leased office space of $200,000 is classified as restricted cash and is not included in cash and marketable securities totals for March 31, 2013 or December 31, 2012.

Operating activities

For the three-month period ended March 31, 2013, our operating activities provided cash of $3,595,000 reflecting net income of $2,338,000 and non-cash charges totaling $957,000 including depreciation, amortization, stock-based compensation charges and deferred tax expense. The remaining cash flow used in operations resulted from favorable changes in various working capital accounts.

For the three-month period ended March 31, 2012, our operating activities provided cash of $1,734,000 reflecting net income of $1,226,000 and non-cash charges totaling $770,000 including depreciation, amortization, stock-based compensation charges and the gain on bargain purchase. The remaining cash flow used in operations resulted from 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 $5,049,000 for the three-month period ended March 31, 2013, primarily due to net purchases of marketable debt securities and $322,000 used for fixed asset additions. For the three-month period ended March 31, 2012, our investing activities consumed $386,000, primarily due to net purchases of marketable debt securities and $157,000 used for fixed asset additions.

Financing activities

Exercises of stock options provided cash receipts of $957,000 and $114,000 in the three-month periods ended March 31, 2013 and 2012, respectively.

We do not currently use derivative financial instruments.

Working capital increased by approximately $6,347,000 to $61,804,000 at March 31, 2013 from $55,457,000 at December 31, 2012 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 continue the integration of the Novozymes Biopharma Business and recognize expected synergies;

• our ability to establish one or more partnerships for development and commercialization of RG1068 or RG2833;

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

• 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 operating expenses in the year ending December 31, 2013 to decrease as we invest less in therapeutic drug development and simultaneously improve gross margins through greater optimization


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of our two production facilities and other process improvements we have developed internally. 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, expansion of our Waltham facility and other purchases of property, plant and equipment, the acquisition of additional bioprocessing products and technologies to complement our existing manufacturing capabilities, 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 do not have any special purpose entities or off-balance sheet financing arrangements as of March 31, 2013.

Contractual obligations

As of March 31, 2013, 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             $ 15,583     $       2,219     $ 4,438     $ 3,590     $       5,336
Purchase obligations (1)                   4,406             4,406          -           -                 -
Contingent consideration (2)               1,513             1,088         197         228                -

Total                                   $ 21,502     $       7,713     $ 4,635     $ 3,818     $       5,336

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

(2) These minimum contingent consideration amounts relating to acquisitions are recorded in accrued expenses and long term liabilities on our consolidated balance sheets.

Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q 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 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, express or implied statements regarding current or future financial performance and position, our strategic decision to focus on the growth of our bioprocessing business, management's strategy, plans and objectives for future operations or acquisitions, 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, risks associated with: the success of current and future collaborative or supply relationships, including our agreement with Pfizer, our ability to successfully negotiate and consummate development and commercialization partnerships for our portfolio of therapeutic and diagnostic assets on acceptable terms, if at all, our ability to successfully grow our bioprocessing business, including as a result of acquisition, commercialization or partnership opportunities, 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, reduced demand for our products that adversely impacts our future revenues, cash flows, results of operations and financial condition,


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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 successfully integrate Repligen Sweden, including achieving manufacturing efficiencies at Repligen Sweden, 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 December 31, 2012.

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