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

Show all filings for REPLIGEN CORP

Form 10-Q for REPLIGEN CORP


7-Aug-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 flexible 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.

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®. 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. We expect that the upcoming loss of these royalty payments will materially and adversely affect our revenue and operating results.

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. 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 spinal muscular atrophy program, or SMA program, led by RG3039, a small molecule drug candidate in clinical development for SMA, 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 substantially all of our remaining obligations during the quarter ended June 30, 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 to the European Medicines Agency 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 have also received from the FDA the requirements for an additional registration study. We believe this information 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 ("FA") patients in Italy in the fourth quarter of 2012 and completed the patient dosing in the quarter ended March 31, 2013. The results of the study support the use of an oral HDAC inhibitor in the treatment of FA, demonstrating a dose-dependent improvement in the expression of a disease biomarker. While RG2833 was shown to be well tolerated and no adverse events were


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reported, the generation of potentially toxic metabolites was observed. We believe that other compounds in our HDAC inhibitor portfolio may be more suitable than RG2833 for clinical development, and in alignment with our focus on bioprocessing; we continue to seek non-profit and biopharmaceutical development partners to support future development of this program.

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 June 30, 2013 vs. June 30, 2012

Revenues

Total revenues for the three-month periods ended June 30, 2013 and 2012 were comprised of the following:

                                         Three months ended
                                              June 30,                % Change
                                          2013          2012        2013 vs. 2012
                                           (in thousands, except percentages)
       Bioprocessing product revenue   $   13,014     $ 11,659                  12 %
       Royalty and other revenue            4,495        3,865                  16 %

       Total revenue                   $   17,509     $ 15,524                  13 %

Sales of bioprocessing products for the three months ended June 30, 2013 and 2012 were $13,014,000 and $11,659,000, respectively, an increase of $1,355,000, or 12%. 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 $4,285,000 and $3,580,000 for the three months ended June 30, 2013 and 2012, respectively. We expect to receive these royalty payments for Bristol's sales through December 31, 2013. We expect that the upcoming loss of these royalty payments will materially and adversely affect our revenue and operating results.

For the three months ended June 30, 2013 and 2012, we recognized $142,000 and $285,000, respectively, of revenue from sponsored research and development projects under agreements with the National Institutes of Health / Scripps Research Institute and the Friedreich's Ataxia Research Alliance.

We recognized $68,000 of revenue from the upfront payment under the Pfizer License Agreement in the three months ended June 30, 2013. 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.

Costs and operating expenses

Total costs and operating expenses for the three-month periods ended June 30, 2013 and 2012 were comprised of the following:

                                                         Three months ended
                                                              June 30,                   % Change
                                                         2013            2012          2013 vs. 2012
                                                            (in thousands, except percentages)
Cost of product revenue                               $    5,298       $  7,345                   -28 %
Cost of royalty revenue                                      643            537                    20 %
Research and development                                   2,306          2,906                   -21 %
Selling, general and administrative                        3,124          3,418                    -9 %
Contingent consideration - fair value adjustments             35             -                    100 %

Total costs and operating expenses                    $   11,406       $ 14,206                   -20 %


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Cost of product revenue was approximately $5,298,000 and $7,345,000 for the three-month periods ended June 30, 2013 and 2012, respectively, a decrease of $2,047,000 or 28%. This decrease is primarily due to operational efficiencies implemented during 2012 at Repligen Sweden offset by higher overall costs associated with increased bioprocessing product revenue in the second quarter of 2013 as compared to the second quarter of 2012. Gross margins may decline slightly over the remainder of the year based on expected production volume and shipments, product mix and the sale of higher cost inventory that was produced at a higher cost level in 2012.

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 June 30, 2013 and 2012, the cost of royalty revenue was approximately $643,000 and $537,000, respectively. This increase is directly related to the increase in Bristol royalty revenue noted above.

Research and development expenses were approximately $2,306,000 and $2,906,000 for the three-month periods ended June 30, 2013 and 2012, respectively, a decrease of $600,000 or 21%. This decrease is primarily attributed to a reduction in therapeutics related research and development expenses partially offset by an increase in bioprocessing research and development expense. For the three-month period ended June 30, 2013, approximately $1,200,000 of our total research and development expenses was incurred on bioprocessing research and development activities.

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 June 30, 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 $3,124,000 and $3,418,000 for the three-month periods ended June 30, 2013 and 2012, respectively, a decrease of $294,000 or 9%. This decrease is primarily attributable to a reduction in outside professional services expenses of approximately $365,000, a reduction in spending on sales and marketing related to therapeutics programs of approximately $150,000 offset by higher employee related expenses of approximately $260,000. Selling, general and administrative expenses in the second quarter of 2012 included non-recurring legal and accounting costs related to complying with reporting requirements with respect to the combined entity after the completion of the Novozymes acquisition, and other business development and corporate activities. For each of the remaining quarters in 2013, we expect similar levels of selling, general and administrative expenses to those incurred in the quarter ended June 30, 2013.

Investment income

Investment income includes income earned on invested cash balances. Investment income was approximately $66,000 and $30,000 for the three-month periods ended June 30, 2013 and 2012, respectively. This increase of $36,000, or 120%, is primarily attributable to slightly higher interest rates and slightly higher average invested cash balances.

Other (expense) income

Other (expense) income was approximately ($122,000) and $458,000 for the three-month periods ended June 30, 2013 and 2012, respectively, and are primarily attributable to foreign currency gains (losses) related to our Sweden operations.

Provision for income taxes

For the three months ended June 30, 2013, we had income before taxes of $6,033,703 and a tax provision of $1,494,516 based on an effective tax rate of 25.69%. 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 U.S. statutory tax rate primarily due to the expected utilization of prior year net operating loss carryforwards in excess of amounts previously benefitted and the lower statutory tax rate in Sweden.

For the three months ended June 30, 2012, we had income before taxes of $1,778,193 and a tax provision of $208,230 based on an effective tax rate of 8.72%. 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.


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Six months ended June 30, 2013 vs. June 30, 2012

Revenues

Total revenues for the six-month periods ended June 30, 2013 and 2012 were comprised of the following:

                                          Six months ended
                                              June 30,                % Change
                                          2013          2012        2013 vs. 2012
                                           (in thousands, except percentages)
       Bioprocessing product revenue   $   24,948     $ 21,002                  19 %
       Royalty and other revenue            9,017        7,346                  23 %

       Total revenue                   $   33,965     $ 28,348                  20 %

Sales of bioprocessing products for the six-month periods ended June 30, 2013 and 2012 were $24,948,000 and $21,002,000, respectively, an increase of $3,946,000, or 19%. 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 $8,131,000 and $6,660,000 for the six-month periods ended June 30, 2013 and 2012, respectively. We expect to receive these royalty payments for Bristol's sales through December 31, 2013. We expect that the upcoming loss of these royalty payments will materially and adversely affect our revenue and operating results.

For the six months ended June 30, 2013 and 2012, we recognized $763,000 and $686,000, respectively, of revenue from sponsored research and development projects under agreements with the National Institutes of Health / Scripps Research Institute, Go Friedreich's Ataxia Research, and the Friedreich's Ataxia Research Alliance.

We recognized $124,000 of revenue from the upfront payment under the Pfizer License Agreement in the six months ended June 30, 2013.

Costs and operating expenses

Total costs and operating expenses for the six-month periods ended June 30, 2013 and 2012 were comprised of the following:

                                                          Six months ended
                                                              June 30,                   % Change
                                                        2013            2012           2013 vs. 2012
                                                            (in thousands, except percentages)
Cost of product revenue                               $ 12,194        $ 12,618                     -3 %
Cost of royalty revenue                                  1,220             999                     22 %
Research and development                                 4,490           5,714                    -21 %
Selling, general and administrative                      6,432           6,846                     -6 %
Contingent consideration - fair value adjustments          (19 )            -                    -100 %
Gain on bargain purchase                                    -             (314 )                  100 %

Total costs and operating expenses                    $ 24,317        $ 25,863                     -6 %

Cost of product revenue was approximately $12,194,000 and $12,618,000 for the six-month periods ended June 30, 2013 and 2012, respectively, a decrease of $424,000 or 3%. This decrease is primarily due to operational efficiencies implemented during 2012 at Repligen Sweden offset by higher overall costs associated with increased bioprocessing product revenue in the first six months of 2013 as compared to the first six months of 2012. Gross margins may decline slightly in the second half of the year based on expected production volume and shipments, product mix and the sale of higher cost inventory that was produced in 2012.

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 six-month periods ended June 30, 2013 and 2012, the cost of royalty revenue was approximately $1,220,000 and $999,000, respectively. This increase is directly related to the increase in Bristol royalty revenue noted above.


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Research and development expenses were approximately $4,490,000 and $5,714,000 for the six-month periods ended June 30, 2013 and 2012, respectively, a decrease of $1,224,000 or 21%. This decrease is primarily attributed to a reduction in therapeutics related research and development expenses partially offset by an increase in bioprocessing research and development expense. For the six-month period ended June 30, 2013, approximately $2,300,000 of our total research and development expenses was incurred on bioprocessing research and development activities.

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. We expect total research and development expenses to be lower in the second half of 2013 than in the first half of the year. 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 $6,432,000 and $6,846,000 for the six-month periods ended June 30, 2013 and 2012, respectively, a decrease of $414,000 or 6%. This decrease is primarily attributable to a reduction in outside professional services expenses of approximately $600,000, a reduction in spending on sales and marketing related to therapeutics programs of approximately $300,000 offset by higher employee related expenses of approximately $492,000. Selling, general and administrative expenses in the second quarter of 2012 included non-recurring legal and accounting costs related to complying with reporting requirements with respect to the combined entity after the completion of the Novozymes acquisition, and other business development and corporate activities. For each of the remaining quarters in 2013, we expect similar levels of selling, general and administrative expenses to those incurred in the quarter ended June 30, 2013.

For the six months ended June 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 $127,000 and $61,000 for the six-month periods ended June 30, 2013 and 2012, respectively. This increase of $66,000, or 108%, is primarily attributable to slightly higher interest rates and slightly higher average invested cash balances.

Other (expense) income

Other (expense) income was approximately ($93,000) and $568,000 for the six-month periods ended June 30, 2013 and 2012, respectively, and are primarily attributable to foreign currency gains (losses) related to our Sweden operations.

Provision for income taxes

For the six months ended June 30, 2013, we had income before taxes of $9,655,771 and a tax provision of $2,778,348 for an effective tax rate of approximately 28.77%. This is based on an expected effective tax rate of 25.69% 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.

For the six-month period ended June 30, 2012, we had income before taxes of approximately $3,063,572 and a tax provision of $267,137, based on an effective tax rate of 8.72%. 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 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, research and development grants, and potential milestones earned under our collaboration agreement with Pfizer or under other potential out-licensing arrangements that may occur. 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. If we are unable to replace these royalty payments with an alternative source of revenue and related income, our revenue and operating results will be materially and adversely affected.


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At June 30, 2013, we had cash and marketable securities of $62,791,000 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 June 30, 2013 or December 31, 2012.

Operating activities

For the six-month period ended June 30, 2013, our operating activities provided . . .

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