Repligen Corporation (RGEN) Q4 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fourth Quarter and Full Year 2012 Repligen Corporation Earnings Conference Call. My name is Lacy, and I'll be your coordinator for today. [Operator Instructions] I would now like to turn the call over to your host for today's call, Mr. Jonathan Lieber, Treasurer and Chief Financial Officer for Repligen.

Thanks, Lacy. Thanks, and good morning, everybody. The purpose of today's call is to discuss our Q4 2012 results, updated 2013 financial guidance and growth strategy. Joining me on the call today is Walter Herlihy, our President and CEO. At the outset, I'd 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. I'll now continue with the financial results. This morning, we reported results for the fourth quarter ending December 31, 2012. For the quarter, we recorded bioprocessing product revenue of $9.7 million, an increase of 212% from the prior year. Growth was led by the acquisition of Repligen Sweden, which closed late in December 2011. Total revenue for the quarter, including royalty and research revenue, was $18.8 million and included $4.9 million of revenue related to the upfront payment from Pfizer in connection with the licensing agreement for our spinal muscular atrophy reprogram. Net income for the quarter was $9.6 million, or $0.30 per diluted share, compared to a net loss of $2.2 million, or $0.07 per share, for the quarter ended December 31, 2011. Repligen ended the year with $50 million in cash and marketable securities. This amount excludes the $5 million upfront payment from Pfizer, which we received in January 2013. Today, we're providing our financial expectations for 2013. We expect total revenues of between $63 million and $65 million, including bioprocessing product revenue of $46 million to $48 million. We expect operating income of between $20 million and $22 million in 2013 compared to $11.1 million in 2012. We are also projecting net income of $18 million to $20 million compared to $14.2 million in 2012. We expect a significant improvement in gross margins, to approximately 50%. In addition, we expect a reduction in R&D expenses, to approximately $6 million, and we expect SG&A expenditures of approximately $12.3 million. We currently have plans to expand our Waltham manufacturing facility in 2013, with between $5 million and $6 million in capital improvements to prepare for anticipated increases in demand in 2014 and beyond. The company currently has approximately $45 million in net operating loss carryforwards and other tax credits available to reduce future U.S. income taxes, and we expect our tax liability to be approximately $2 million in 2013, or roughly 10% of pretax income. These taxes are primarily the result of profits earned in our Swedish subsidiary for which we cannot utilize the aforementioned tax credits. Finally, we expect to end the year with approximately $65 million in cash, cash equivalents, which is about $15 million ahead of our previously discussed cash position at the end of 2012. This guidance is based on expectations for our existing business and does not include the impact on revenue and expenses of potential milestone payments from Pfizer, additional out-license agreements for our remaining clinical assets, potential bioprocessing acquisitions or fluctuations in foreign currency exchange rates. Now I'll turn the call over to Walt to discuss our growth strategy.

Thanks, Jon. In 2012, our primary focus was the integration of Repligen Sweden into our operations, and improving gross margins in our base Protein A manufacturing business. We made excellent progress on these objectives, and the 2 sites are now working in a coordinated fashion to most efficiently meet the increasing demands for the Protein A products, which we manufacture. Our progress is reflected in our forecast today of a 10-point increase in gross margin from 40% in 2012 to 50% in 2013. This improvement is the result of specific R&D efforts to improve manufacturing yields in the fermentation and purification of several of the high-volume products, as well as higher capacity utilization in Sweden. We are planning continued R&D efforts in 2013 to further enhance manufacturing efficiencies. Now I would like to spend a few minutes on innovation and on our organic growth strategy. While we expect continued increases in demand for Protein A as the market for monoclonal antibodies continues to expand, we believe there are significant opportunities for growth from both our OPUS chromatography and IGF-1 growth factor products. In addition, we are currently developing 5 new products or line extensions, which we hope to advance to either prototype or launch by the end of the year. These include, one, products we are developing in collaboration with large companies who will ultimately market the product; two, line extensions of our OPUS and growth factor product lines, which will be sold by our sales force or through distributors; and three, novel forms of Protein A chromatography media suited for specific customer applications. While product development always has risk and not every program will succeed, we believe there are unmet needs in the market, which our product development expertise can address. In parallel, we intend to expand our sales and marketing reach. We are increasing our presence at industry conferences this year and initiating print advertising to promote our growth factor and OPUS product lines. We will also seek new distribution or OEM partnerships in geographies and customer segments which are currently beyond the reach of our focused sales force. We believe the expanded market access for both existing and new products will support growth beyond the expected increases in demand of Protein A products. Even as we plan to drive organic growth, we will continue to opportunistically seek to broaden our product offering with selective technology, product or company acquisitions. In summary, we are committed to building a best-in-class life sciences company focused on the development, manufacture and sale of high-value consumables for the growing biomanufacturing market. We believe that our focus on manufacturing efficiencies in our core business, coupled with the dedication to new product innovation and additional partnerships to extend our marketing reach, will enable us to fully capitalize on the expanding market for biological therapies and to build a sustainably profitable and valuable company over the long term. We look forward to updating you on our progress. I will now turn the call over to the operator for the question-and-answer period.

[Operator Instructions] And our first question will come from the line of Drew Jones with Stephens Inc.

Just thinking about the SMA and some of the milestone payments there, could you give us some color on maybe timelines and what are the next milestones we should be looking for?

So there are a series of milestone payments that are divided roughly equally between clinical development milestones, Phase I, II, III, and then on the other half, commercial launch milestones. So there is a clinical milestone based on an early stage clinical trial, which Pfizer will be taking the responsibility for, and while it's obviously very difficult to predict when a clinical trial will be completed, we would expect that would likely be completed, if things go according to the plan, by the end of 2014.

And then can we get an update on -- I believe you guys are shifting some production from Waltham to the Swedish facility. Can you give us an update there? Where we stand? And once completed, what we should think about the impact there on product gross margins?

Sure. So as noted in our remarks today, we are in fact increasing production and capacity utilization in Sweden, as our Waltham facility is pretty much running at 100% of its capacity. That's one of the drivers, Drew, of the increase of the gross margin that we are expecting in 2013. Sweden has a high fixed cost. It's a very high-tech capital intensive plan. And as we increase capacity utilization there, the incremental profits are driving that increase, partially driving that increase in gross margin. We expect that trend will continue. Sweden is not yet running at 100% capacity. But beyond 2014, we expect to have additional capacity in Waltham, as Jon indicated.

And then last one, obviously you can't predict what the FDA is going to do but if we think about increasing demand from Protein A, are there any areas we should be paying attention to over the next 12, 18 months in terms of potential new approvals?

Well, there are about 350 monoclonal antibodies in various stages of the pipeline. Certainly, as we noted on our last conference call, we think antibodies that are directed towards controlling LDL, or bad cholesterol, might be a very important new area of application beyond the traditional applications in oncology and inflammation. I would also point out that it was recently -- there was an approval of a product called TDM 1 for -- it's a very powerful new therapy for breast cancer. So that will be launching this year, and I would expect that it would get a widespread and rapid uptake in the marketplace. So those are a couple of the examples. But with 350 products in development, it's just really hard to tell where the next blockbuster is going to come from, honestly.

[Operator Instructions] And our next question will come from the line of Michael Wood with LSA.

Walt, just following up on your comments about driving organic growth in 2013, 10% to 15%. I guess some of these increases is probably related to the continued growth in the monoclonal antibody market. But I understand that internal innovation of the company is also part of achieving this goal. Can you maybe just go over your plans again for driving this increase internally? And maybe are there any specifics here that you can share with us?

Sure. Well, as I indicated, Mike, we're pretty excited about the growth factor product that we acquired from the acquisition of Repligen Sweden from Novozymes. We feel that hadn't been really properly positioned or marketed and it's competing in a market for growth factor that's dominated by insulin. And we have less than a 10% market share. So we think there's a terrific opportunity to develop the right collateral around that product and to make significant gains there. And of course, we've talked many times about our OPUS chromatography product line as well. It's one that we're excited about. As far as the new products go, obviously, there's confidentiality because we're working with customers and potential partners under confidentiality. But one example I can share with you is the -- 1 of the 5 programs we have running here is to develop a larger sizes of our OPUS columns. And this is a direct response to customer inquiries as to whether columns that are 4 times the volume of our largest column might be available in the near term. These are being driven by the fact that people are using larger and larger bioreactors, getting higher and higher titers, and therefore need larger volume columns. So we hope to have a prototype column that's considerably larger than our highest offering, ready to go sometime in the next year or so.

Okay, great. And a follow-up question, if I may. Now that the integration with Repligen Sweden is more or less complete, can you help us understand how we should think about the components of bioprocessing going forward? I know that your position with Protein A market drives a lot of your bioprocessing business today. But what about going forward, what excites you most when you think about new product development?

Sure. I think, Walt mentioned a couple of the things that we've got going on, obviously, from an R&D perspective. I think one of which is certainly working on our growth factor line. Growth factors were something that, I think, when we acquired Repligen Sweden, we definitely perhaps underestimated the power of that product offering, and we've certainly seen a lot of demand for it. We're working on certainly with a distributor to increase the uptake in that product. It's a -- we believe it's a much better product than insulin. Certainly, it's more biologically active. And so we're very excited, and we think there's big opportunities to grow that business. And then, of course, Walt talked about the other areas of product development that we're working on with our OPUS columns. And then, we've got some other things that we're working on, which we can't really talk about, but sort of I'll call them niche applications for specialty Protein A media, as another example of things that we think could be an important driver of growth going forward.

And our next question will come from the line of Ron Chez, private investor.

Could you talk about the size of the market for growth factors and columns?

Well, the size of the market, just to break down the columns market first, we are, of course, referring to columns that are used primarily in clinical manufacturing. They may also be used in some low-volume orphan products, and we think the size of that market is about $100 million. And when I talk about market sizing, I'm talking about the columns and of course, the media that goes inside those columns. No one really tracks that market segment. There's no independent market research that tracks that. But our sense is that, that market is growing much faster than the base Protein A business or the base monoclonal business, as we've seen a dramatic expansion in the number of monoclonals being -- or even biologics, for that matter, but primarily monoclonals being tested in the clinic. So, we think it's a very dynamic market at the moment. As far as the growth factors goes that Jon indicated, insulin is the dominant product used to promote the growth of engineered lines, cell lines. And we think that the total growth factor market, most of which is insulin, is probably in the $50 million to $75 million range. We have about 10% of that in terms of sales of our IGF-1 product.

And what is the status now with regard to results or progress with regard to 1068 and Friedreich's Ataxia? Aren't some results due by the end of this month?

That's correct. We expect to complete the Phase I trial in patients with Friedreich's Ataxia in the next couple of months. And so part of that trial is to collect, of course, safety and pharmacology data. We're also collecting what we call biomarker data, looking at whether there's any biological response to the single-dose drug treatment, and we'll have that in a couple of months or so.

So you would expect results in the second quarter?

Correct.

And 1068?

Well, there's no active trials running in 1068, of course. That program has been put on hold. And there, the only activity we have going on is discussions with FDA about clinical trial design and the specifics with how one would go about constructing a pivotal trial.

And how is that going?

Well, I think it's going -- we're making progress. As with everything with the FDA, it's not necessarily moving at warp speed, so there's a lot of back and forth and a lot of details to be discussed.

[Operator Instructions] And at this time, I show that we have no questions in queue. I would like to turn the call back over to Walter Herlihy for closing remarks.

Okay. Well, thanks, everyone, for participating in today's call. And as always, if there are additional questions or comments, please feel free to contact us through Investor Relations. Thank you.

Thank you for your participation in today's conference. This concludes your presentation. You may all disconnect. Good day, everyone.