Repligen Corporation (RGEN) Q2 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 Repligen Corporation Earnings Conference Call. My name is Shaquanna, and I will be your coordinator for today. [Operator Instructions] I would now like to turn the presentation over to your host for today's call, Mr. Bill Kelly, Chief Financial Officer. Please proceed, sir.

Thank you, and good morning. The purpose of today's call is to discuss our announcement of Q2 2012 results and our announcement today to focus our business on bioprocessing. Joining me today is Walter Herlihy, our President and CEO. At the outset, I would like to state that this discussion may contain forward-looking statements. These statements are subject to risks and uncertainties which may cause our plans to change, or results to vary. In particular, unforeseen events outside of our control may adversely impact future results. Additional information concerning these factors is discussed in our Annual Report on Form 10-K, the current reports on Form 8-K we filed today and other filings we make with the Securities and Exchange Commission. Except as required by law, we assume no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Now, I will turn the call over to Walter Herlihy to comment on our strategy.

Thank you, Bill. Today, we announced the strategic decision to focus our resources on the growth of our Bioprocessing business. Our Bioprocessing business is based on the development and manufacture of high value consumables, which are used to manufacture biologic drugs including monoclonal antibodies. This decision by our Board and management is based on 5 key factors. First, our current business is well-positioned in an attractive growth area, namely the expanding market for biologic drugs and particularly the market for monoclonal antibodies. Our December 2011 acquisition and successful integration of Repligen Sweden provide us a critical mass of products which will enable us to grow with this market. There are possibly 30 monoclonal antibodies on the market today and 300 additional monoclonals in development for an ever-expanding range of clinical indications. Given a small fraction of these become significant products, the market for monoclonal antibodies will expand significantly and drive future growth in the demand for Protein A products which we manufacture. We've also made investments to enable us to participate in other high growth areas in bioprocessing such as disposable technologies for biomanufacturing. Second, Repligen has established a leading brand in the bioprocessing industry. We have significant internal technical expertise in bioprocessing, which have been developed for over -- more than a decade and which is recognized across the life sciences industry. We are a technology partner of choice that the market leaders turn to for collaboration on the development, scale up and manufacturing of new Protein A-related products. Third, we have established relationships, including long-term manufacturing and supply agreements with world-class partners including GE Healthcare, the Millipore and Sigma-Aldrich. These agreements enable us to benefit from the global marketing reach of these organizations and operate our business more efficiently. Fourth, our Bioprocessing business does not carry the uncertainty and risk associated with any single clinical trial outcome or regulatory decision. And finally, we believe that with the full focus of management, we can identify additional opportunities to grow our bioprocessing franchise through a combination of continued sales growth for existing products, co-development of new products with existing partners, product innovation including additional disposable technologies for biomanufacturing, and the selective acquisition of products or companies to expand our product portfolio. We believe that these 5 factors: the expanding of Biologics' market, our expertise, our partnerships with long-term supply agreements, low regulatory risk and new growth opportunities provide a compelling rationale to support our decision to focus on our Bioprocessing business. We also believe that this decision is in the best interest of shareholders as it provides a clear investment thesis to attract new investors who want exposure to this rapidly growing marketplace without the binary risk inherent in pharmaceutical product development. Now, I'll turn the call over to Bill Kelly, who will discuss our second quarter results. After which, I will provide additional details on our near-term plans.

Thank you, Walt. This morning, we reported results for the second quarter ended June 30, 2012. For the quarter, we recorded bioprocessing product revenue of $11.6 million, an increase of $7.3 million, up 168% from the prior year. Revenue was driven by the addition of Repligen Sweden and strong organic growth of our Bioprocessing business. Total revenue for the quarter, including royalty and research revenue, was $15.5 million, an increase of 103%. Net income for the quarter was $1.6 million or a gain of $0.05 per diluted share, compared to a net loss of $55,000 or $0.00 per share for the quarter ended June 30, 2011. For 2012, we are now projecting bioprocessing product revenue of $41 million to $43 million, and currently project total revenue of approximately $55 million to $57 million, which represents the second increase in our projections this year. For the year, we are now projecting GAAP net income of $5 million to $7 million, our expenses for 2012 includes $4.3 million of non-cash expenses including depreciation, amortization and stock-option expenses. Research and development expenditures for the quarter were $2.9 million or 25% of product revenue, compared to 81% of product revenue in Q2 of the prior year. This result demonstrates the significant positive impact our acquisition of Novozymes Biopharma AB has had, and the dramatic progress we have made in the past year transforming our business from a product development model to an integrated commercial organization. Going forward into 2013, we expect to continue a downward trend on R&D expenditures, with R&D expenses at around 10% to 20% of revenue once our partnering efforts are complete. While the company does currently have over $60 million in net operating loss carryforwards and other tax credits available to reduce future U.S. income taxes, we recorded a tax provision of $200,000 or 8% of pretax income to primary reflect profits earned in our Swedish subsidiary for which we cannot utilize those credits. Finally, we expect to end the year with approximately $43 million in cash. I will now turn the call back over to Walter Herlihy for an update on our Bioprocessing business and development programs.

Thanks, Bill. During the second quarter, we completed contract development of a commercial-scale manufacturing process for a new highly selective affinity ligand from GE Healthcare life sciences. Affinity resin based on this product was recently launched by GE for the purification of antibody fragments, which were gaining attention as potential future pharmaceuticals because they offer a number of advantage over full length monoclonal antibodies such as improved tissue penetration. Several other new product development programs are either ongoing or in negotiation with multiple life sciences companies. As I mentioned in my opening remarks, this is evidence of our established technology leadership position in a Protein A related market. This year, we have also initiated several other bioprocessing R&D investments, including a project to expand the OPUS product line based on direct feedback from customers, and collaborations with others to identify new media for single-use chromatography. We have also carried out multiple project to identify specific improvements in the manufacturing processes for several of our products, which have the potential to improve the efficiencies in manufacturing in 2013 and beyond. Turning now to RG1068. Our decision to focus on bioprocessing necessarily means we will reduce our development efforts on RG1068, our agent for pancreatic imaging. We continue to believe that this is a safe and effective imaging agent with the potential to reduce health care costs. However, given the momentum and the opportunities we see in our core Bioprocessing business, we believe that halting further direct investment in the RG1068 program is in the best interest of the company and our shareholders. We intend to seek a partner for further development of RG1068 and we'll not independently initiate additional clinical studies. We are currently preparing a Phase III clinical protocol, which we plan to discuss with the FDA in the coming months. We believe that the FDA's feedback on a clinical study plan will help clarify our path to product approval for potential partner. In-line with the strategy, we have decided to withdraw our marketing authorization application in the European Union. For our CNS pipeline, we have also decided to reduce our efforts in the development of RG3039 for Spinal Muscular Atrophy and the investment in our HDAC program for Friedreich’s Ataxia and potentially other indications. We will continue to support enrollment of patients in our active Phase I trial of RG2833 for Friedreich's Ataxia. This 20-patient trial is being conducted in patients with Friedreich's, and in addition to pharmacokinetics and safety results, we are monitoring several biomarkers of response, which if positive, could materially improve the value of this program. We are working on a detailed transitional plan for these programs that will meet the best needs of all stakeholders, including our nonprofit partners who have partially supported our prior and ongoing efforts. In summary, we are committed to growing a best-in-class life sciences company, focused on the development, manufacturing and sale of high-value consumables for the growing biomanufacturing market. We believe we have the expertise, facilities, partners and strategy to be successful in growing this business through a combination of internal innovation, the development of new products for partners and acquisitions. We look forward to updating you on our progress. I will now turn the call over to the operator for our question-and-answer period.

. [Operator Instructions] Your first question comes from the line of Scott Gleason representing Stephens.

I guess, just first off, Walt, when we look at the quarter here and the growth rate that you guys saw on bioprocessing, can you give us a little bit of a sense for how much Novozymes contributed, if were to look at kind of the organic growth, I guess, for your core business prior to the Novozymes transaction?

Sure, Scott. If we take a look, on a pro-forma basis of 2012 versus 2011. We anticipate an organic growth rate for the combined businesses of between 15% and 20% this year.

Okay. And so obviously, Walt, that's probably a bit faster than probably the market growth rate right now when you look at the monoclonal antibodies side on a volume basis? Can you give us a little bit of a sense for where some of that additional growth is coming from? You guys mentioned the OPUS prepacked columns on the call. I mean, can you give us a little more granularity and just kind of where are you seeing some of the strength there?

Yes. Three things are driving that, Scott. The first is that while the dollars in the nominated market for all monoclonal antibodies is growing in the high single-digits, we're seeing demand due to the tremendous explosion on the number of clinical trials that are being done for monoclonals. And that's helping drive the Protein A segment of our business faster than the overall growth. The second is that, as you know, we've introduced some new products this year, and so they are contributing incrementally to the growth. And thirdly, as I alluded to, we are receiving some revenue from R&D contracts that are operated with some -- with large life sciences companies, in which they pay us to do R&D, and then in exchange, we have the right to manufacture products for a defined period of time. So we've got a couple of those. There's been uptick in interest in doing those kinds of projects, and those are also contributing to our numbers in 2012.

Okay. And then Walt, I think the decision to basically look for a partner for [indiscernible] makes a lot of sense in terms of prioritizing assets here. I guess, first off, when we look at the licensing deal for that drug, how are you guys kind of thinking about what that could look like in terms of upfront payments, potential milestones, royalty rates?

Just called to speculate on that, Scott. It's kind of a unique product there, as you know. I think, first and foremost, our objective is to ensure the product moves forward and that the R&D is supported by our partner, and so that will be first and foremost. I think for us, we believe in the product and we would be happy to take a substantial part of compensation in milestone payments based on, for example, regulatory approvals or reaching certain market benchmarks, and/or royalties.

Okay, great. And then, just a last question. I guess, when we look at the bioprocessing piece, if I recall, your R&D ties to that segment as a percentage of revenue is kind of in mid single-digits. And so, I guess, when we look at the trajectory of R&D over the longer term, is there reasonable expectation that we kind of get down to that level over a couple of year time horizon here? And can you -- I know you guys mentioned on the call -- you gave a little bit of granularity around that, but can you kind of restate where those, as a percentage of revenue, we would kind of expect that to trend, I guess, over the next 2 years here?

So we look ahead into 2013, and we think about the R&D revenue. As Bill mentioned, the guidance there now is between 10% and 20% of revenue, when once we have transitioned to a fully -- sole bioprocessing operating mode. And again, that R&D expense line is, as I noted in the call, a part of that is the expense associated with carrying out revenue-generating contracts for partners as opposed to pure R&D for new product development. And so, Scott, we have a lot of contracts in place. We might turn to the higher end, but those are revenue generating, of course. And if -- in the absence of those kinds of collaborative revenue-generating contracts, we tend to trend toward the lower end of that range.

And so, I guess, the right way to think about that, Walt, is we would see offsetting revenue benefit associated with those over time?

For a portion of it.

[Operator Instructions] Your next question comes from the line of Michael Wood representing LSA.

I think you've previously expressed an interest in bolt-on acquisitions to expand the Bioprocessing business in the past, as a way to reach critical mass revenue and improve margins. Can you help us understand, what is the company profile that you would consider to be a fit for Repligen. And how would you finance such an acquisition?

Okay, the first part of your question, we primarily would look for products and or companies in tight adjacencies to the markets we're participating and the products we're developing now. So we would not consider doing bioprocessing acquisitions to buy, for example, a capital equipment company or a contract manufacturing organization. We want to stay focused on the consumables, using biomanufacturing. As the Novozymes acquisition did, it allowed us to expand from consumables just used for purification of antibodies to, for example, fermentation growth factors. So that will be an example of the logical adjacency, which has the same customer has the same technology. On the financial side, we would look for companies of a size that could appreciably improve our top line results, and which don't have to be accretive immediately but will have a path to being ultimately an accretive acquisition on a profits point of view. We're not looking to buy companies that are purely in an R&D mode. It'd have to be, at a minimum, EBITDA positive to meet our criteria.

And then the financing of such a transaction?

Well, that will really depend on the details. Obviously, we can use cash that we have in hand. It's potentially a contingent value rights, whether they're earn-outs or royalties, and in some cases, equity may be involved as well.

Your next question comes from the line of Ron Chez.

On some of your going-forward estimates and the improved prospect for growth, in prior conference calls, and you just spoke to this, you would expect R&D to be in the neighborhood of 10% to 20%, trending lower though, if nothing else was going on towards the dent, right?

That's the range, that's right.

And SG&A, you had previously talked about 10%.

10% was an allocated number of SG&A. Our SG&A is -- let's break that down. Our G&A is about $10 million or so as a public company, and we have sales and marketing that's devoted to bioprocessing of several million dollars.

And G&A is $10 million?

Correct.

And your expectation, if you're getting to and looks like you can get there quicker, the 50 million in sales -- or what would you expect? What is your goal for cost of goods sold?

Well, ultimately, our goal is to approach 50% target. That will take some time as we implement some of the innovations that I spoke about in the call, where we work to improve yields, improve utilization of capacity, manufacturing capacity and people. And so that's a process that will ripple through the P&L in 2013 and 2014.

[Operator Instructions] Your next question comes from the line of Paul Avery representing FARA.

As a -- I've been a shareholder for Repligen for several years, a Board member of FARA and a parent of 2 children with Friedreich’s Ataxia. We've been this -- I had just a couple of comments followed by question here. FARA has been staunch supporters of Repligen for a number of years and have been really excited about the potential powerful benefit that the HDAC program possesses. Having the orphan diseases status, the fast-track approvals and the exclusivity provided from a European standpoint, as well as domestically, it could be significant for the company as you well know. The market potential, we believe, has been quantified at approximately $0.5 billion just for FA, if we you add in SMA, it's close to $1 billion. So, and being first-to-market does provide significant benefits here. So I'm certainly disappointed to hear about the pull-back on that. Understand you're making a business decision, but disappointed about any delay that would be in this program. It is good news to hear that you're continuing efforts in Italy, and we support that, and we're like 60% through that program today. If you do see, the question is, if -- actually 2, what does detailed transitional plan mean that you mentioned, and if the company does see benefit in the Italy trials, is there -- what is the likelihood of continuation in Italy? And then is there any likelihood of a effort to take this domestically and to capitalize on the potential for Repligen?

Sure. So first, I -- certainly, we at Repligen appreciate the funding we've got from FARA and other organizations that have helped moved these programs along. And we do have funding from another organization with a clinical study in Italy and we intend to continue to do the acquisition, as you say, we're already halfway through that process. My feeling is, Paul, that as I mentioned in my prepared remarks, that if we are able to obtain a biomarker result, in other words treatment of a Friedreich’s Ataxia patient with 2833 causes the biochemical abnormalities one can observe to be corrected, that that will provide a launching pad for attracting much more significant resources to this program through the mechanism of partnering. And so we are committed to getting as much of information as possible into our package, which we could then use for partnering. And that's something that we're going to strive to do between now and the end of the year.

And we do have a -- there is that follow-up compound that is believed to be an improved compound that we could use domestically. So it sounds as the traditional plan would include a different partnership at that point if there is success in Italy so...

Yes, I think that's really the key. Success in the clinic will open the door to a potentially very significant partnership.

[Operator Instructions] At this time, I would like to turn the call over to Mr. Walter Herlihy for closing remarks.

Okay. Well, I would like to thank everyone for participating on today's call, and, as always, if you have follow-up questions, please feel free to contact the company through Investor Relations. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.