Repligen Corporation (RGEN) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Third Quarter 2013 Repligen Corporation Earnings Conference Call. My name is Dave. I'll be your coordinator. [Operator Instructions] As a reminder, the call is being recorded for replay purposes. [Operator Instructions] I'd now like to turn the call over to your host for today's call, Mr. William Kelly, Chief Accounting Officer for Repligen. Please proceed, sir.

Thank you, and good morning. The purpose of today's call is to discuss our third quarter 2013 results, Q3 business highlights and to update our financial guidance for the year 2013. Joining me 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. This morning, we reported results for the third quarter ended September 30, 2013. For the quarter, we reported bioprocessing product revenue of $12.2 million, an increase of approximately 10% from the prior year. Total revenue for the quarter, including royalty and research revenue, was $18.8 million, which represented an increase of approximately 25% over the prior year period. Net income for the quarter was $5.9 million, or $0.18 per diluted share, compared to net income of $1.8 million or $0.06 per share for the year ended September 30, 2012. Cash and marketable securities totaled $67.1 million at the end of the third quarter, an increase of $17 million from December 31, 2012. Our bioprocessing gross margin in the third quarter was approximately 53.5% versus approximately 42.3% in the third quarter of 2012. Gross margin improvement was a result of favorable product mix, improved process yields and improved capacity utilization. Research and development expenses in the third quarter were $1.4 million versus $2.4 million in the third quarter of 2012. The decline is primarily due to reduction in R&D expenditures on our therapeutic programs, partially offset by higher spending on bioprocessing R&D in connection with programs designed to drive future revenue growth. Selling, general and administrative expenses in the quarter decreased to $2.9 million from $3.1 million in the third quarter of 2012. The growth in revenue, combined with the improvement in margins and lower operating expenses, resulted in increase in operating income to $8 million in the third quarter 2013 from $2.2 million in the third quarter of 2012. Income tax in the quarter was approximately $2.3 million, which represented an effective tax rate of 28%, and net income for the quarter was $5.9 million compared to $1.8 million in the prior year period. As previously discussed, our reported tax rate is higher than our actual tax payments due to a onetime $2.9 million tax benefit recognized in 2012, which will be used to offset taxes due on 2013 earnings. Today, we're updating our financial expectations for 2013. We now expect total revenues of between $67 million and $68 million compared to our prior expectations of $65 million to $67 million. We continue to forecast bioprocessing product revenue of $46 million to $48 million or 10% to 15% higher than 2012. Bioprocessing gross margins are expected to be 50% to 51%, and operating income is projected at $21 million and $22 million for 2013. We expect our R&D expenses for 2013 to be approximately $7 million, which is $1 million higher than our previous estimate. The increase is partially derived from increased investment in our OPUS product line and partially derived from a onetime expenditure of our Friedreich's Ataxia program to improve the chances of securing a corporate partner on this program. We expect this work to be completed by the end of 2013 and that our R&D expenses in 2014 will be approximately $5 million, which is consistent with our previous guidance for the bioprocessing business. We expect that our effective U.S. GAAP tax rate for 2013 will be between 25% and 27%. However, it is important to note that actual tax payments will be substantially lower than our reported tax expense due to the benefit we derive from our U.S. net operating losses, or NOLs. We expect 2013 cash income tax payments to be approximately 13% to 14% of pretax income, which is consistent with our previous cash flow projections. In addition, we are updating our capital expenditures guidance to approximately $4.5 million, which consists of $3.5 million to expand our U.S. manufacturing facility and $1 million for maintenance of existing facilities and equipment. Finally, we are increasing our projections for year-end cash to between $68 million and $70 million. Our 2013 guidance is based on expectations for our existing business and does not include the impact on our revenue and expenses of additional out-license agreements for our therapeutic assets, potential bioprocessing acquisitions or fluctuations in the foreign currency exchange rates. To summarize, we have had a very strong quarter highlighted by increased bioprocessing product revenue, improving gross margins and significant cash flow. While we intend to provide guidance for 2014 on our Q1 call, we can affirm today that our goals remain unchanged. Our objective is to increase product sales by 10% to 15% and to improve gross margins to greater than 50%. Although we will not benefit from the receipt of our Orencia royalties or R&D grants in 2014, we believe we will be solidly profitable with positive cash flow. Now I will turn the call over to Walt, who will discuss our business highlights for the third quarter.

Thank you, Bill. In our bioprocessing R&D program, we have completed the technical development of a 45-centimeter diameter OPUS column with 2 to 4x greater capacity than the largest column size offered by ourselves or any competitor. The development of this product was based on requests from customers who were running increasingly larger fermentations in their pilot plans, which then require larger columns for product purification. Based on this technical success, we have accelerated our R&D investment in this product in 2013 in order to bring it to market in the first quarter of 2014, which will give us the broadest product offering in the industry. We are encouraged by the fact that we already have quotes out to several potential customers for 45-centimeter columns months in advance of the commercial launch. As our products gain increasing acceptance in the marketplace, we believe that there are further gains to be made from increased promotion of both our IGF-1 growth factor and our OPUS products, which may include an expansion of our direct marketing efforts in 2014, including the hiring of additional sales and marketing personnel. This investment will enable us to move -- more effectively co-promote IGF-I with Sigma-Aldrich and to access a broader range of potential OPUS customers. We may also form collaborations to extend the reach of our OPUS marketing efforts into additional customer segments or geographies. This week, we announced the completion of a 9,000-square-foot facility expansion, which includes a new suite of clean rooms for the manufacture of our OPUS Pre-Packed Chromatography Columns. This suite can support an expansion of our OPUS column business for the next several years and also enable us to produce OPUS products at a higher quality standard than our existing facility. This expansion is part of our plan to position Repligen as a world leader in prepacked columns with the most extensive product portfolio, the capacity to grow with our customers and a manufacturing quality standard which meets or exceeds the standards of the most demanding customers. Finally, we continue to be excited about the dynamic progress of the monoclonal antibody pipeline in 2013 for which there has been a steady stream of positive clinical data. In 2012, the FDA created the breakthrough therapy program to speed the approval of drugs which provides substantial benefits over existing therapies and serious or life-threatening diseases. To date, 6 monoclonal antibodies have been awarded breakthrough designations, including products being developed for various cancers by J&J, Roche, Glaxo and Merck, as well as an antibody being developed by Novartis for an inflammatory muscle condition. The Roche product received marketing approval last week for patients with chronic lymphoblastic leukemia after only 4 months of review by the FDA, which is far faster than for a typical new drug. In summary, we are well positioned to benefit from the expected growth in demand from monoclonals and other biologics, which, in turn, will drive increased demand for bioprocessing products. We believe we can create sustainable shareholder value by building a unique, best-in-class life sciences company focused on the development, manufacture and sale of high-value consumables for bio-manufacturing. We look for to updating you on our progress. I'd now like to turn the call over to the operator for our question-and-answer period.

[Operator Instructions] This comes from the line of Drew Jones.

The product margins looked a lot stronger than we anticipated. We were expecting a pretty big step back sequentially. Can you walk us through what the strength was this quarter and how that compared to last quarter?

Okay. I think part of the strength, as Bill indicated in his remarks, was that we had a favorable product mix, which means we're just selling more products with better -- higher margins than -- versus ones with lower margins. In addition, you may recall that we had some higher-cost inventory in the earlier part of the year, and that has now been exhausted. We are now selling inventory that was made in Lund, post-restructuring. So we have some favorable variances there. And in general, when the -- as was the case last quarter when the overall revenue was higher, all our fixed costs, of course, were spread out over that larger revenue base, which drives higher margin.

Okay. And with the expanded sales effort going forward, it obviously sounds like things are going well with OPUS and growth factor. Can you walk us through some examples of maybe new customers wins or some other areas of success that would kind of warrant that incremental investment?

Well, I think that a year ago, we weren't completely confident. While we knew we had a good product, we weren't completely confident in what the customer reaction and uptake rate would be. I think that now we're seeing a large number, more than 10, what I'll call blue-chip customers, top biopharma groups who are ordering OPUS in -- for use in their pilot plants or clinical manufacturing. And the one hallmark that I think we've seen over the last -- or one indicator we've seen over the last 6 months is that some of those customers have become repeat orders with 2 and 3 orders now in 2013. That indicates to us that we're seeing sustainable adoption and, therefore, that we should continue to press forward to define this as a world-leading franchise by beginning to access other customer segments, it might be in smaller companies, in more distant geographies, et cetera. But repeat order business, I think, for me is the most solid leading indicator.

The next question comes from Paul Knight at Janney Montgomery.

What are you seeing in the market with the level of financings that biotechs seem to be getting now as that smaller biotech customer is showing interest? Is there a change in that market for you?

I can't say there's a quantitatively well-defined change in the market. Certainly, we are seeing some of those customers at trade shows. But I think the real answer to that question goes to my last response to Drew in that those accounts, the smaller biotechs, are not ones that we are detailing directly to as vigorously as we would naturally the top 20 or 30 accounts. No surprise we started the outreach for OPUS with the largest, most prominent, multi-facility biotechs. But part of our plan for 2014 then would be to begin to move down market to mid-cap or smaller-cap companies, which, as you point out, many of whom are well resourced to advance their monoclonal pipeline.

And then there was a recent industry report put out on single-use technologies, and it was really implying that it was going to be -- acceptance really based on large facility installations. But I guess you're not implying that's occurring with OPUS?

When you say large facility, you mean in large companies, the Pfizers and Amgens of the world?

Yes, and then major approvals needed for that to really materialize.

I think our experience in the marketplace has been that most of the interactions and sales we're having are in pilot plant facilities, so smaller 1,000-, 2,000-liter fermentation-scale facilities, which are making, in many cases for the larger companies, multiple products or for contract manufacturers, multiple products for the -- to feed the clinical development pipeline. We do have some conversations with companies who have smaller volume commercial products, but I would characterize that as a small fraction of our current business. As columns get larger, obviously the 45-centimeter is a big step up for us and we have a -- designs to go even larger, the number of accessible orphan drugs or small facility -- small commercial facilities will expand. For the moment, it's largely clinical development.

And then last -- my last question would be, I know a European player, which I guess could be viewed as a competitor to you, has significantly increased their U.S. sales force size. Are you seeing any change in competition out there in the market?

No, we're not. I think we are very happy with the number of wins we're getting versus the number of customers using prepacked columns. We're very happy with that.

The next question comes from the line of Brian Pesti [ph].

You reaffirmed your bioprocessing product revenue growth, about 10% to 15%.

Yes.

Is that -- going forward, '14 and beyond, is that a reasonable sort of base case growth that you foresee over the next 2, 3, 4 years?

Absolutely. As Walt was alluding, as we're diversifying our product base and growing OPUS, et cetera, we -- for sure, we -- that is our goal and our target for the next several years.

The next question comes from the line of Larry Smith.

Walter, you gave us a few metrics that you're looking at on how OPUS is gaining traction in the market. Obviously, number of customers and reorders, which you emphasized. But 2 questions. Are -- what other metrics are you looking at internally? And what metrics can you give us to try to come up with projections on what OPUS may do?

Well, I think that we're still very early in the adoption curve. I would characterize the OPUS customer base as early adopters and innovators. And so I think that it's still early to project where this ultimately might wind up. We do believe there's $100 million of chromatography materials and columns consumed every year in the clinical manufacturing marketplace. I think one of the comments I made in the script, Larry, would be another indicator which, frankly, has surprised us at the company. The development of the 45-centimeter column has not been completed yet. We don't have all the trade dress and the casters and handles, and we're working to complete that by the end of the year so we can launch that product in Q1. But we already have multiple customers who expressed their interest in buying columns sooner rather than later. That's typically not what happens in bioprocessing. Usually, there's a significant lag time while technology evaluations take place of products, QA groups review them, et cetera. We would not be surprised in a normal situation to see a year go by before [indiscernible] gets traction. Early indicators are that this column is meeting a unique need and it's going to go faster than that.

Okay. And Walter, could you give us what the economics might be for an individual 45-centimeter column?

Well, it would depend. The sale price would depend on whether the customer consigns the media to us at no cost and we simply charge them for the packing service, or whether we procure the media at a variety of price points, mark it up and pass that on to the customer. So in the simplest case where we don't have the media in big round numbers a 45-centimeter column will sell for roughly $50,000.

That is prepacked or no?

Well, that's just the plastic. That's the packing service, if you will. And there'll be additional charges if we have to purchase the media, mark that up and pass it on. And that charge will be highly variable based on what the actual cost per liter of that particular media would be.

Okay. And one final question. Why wait until early 2014 to give guidance for 2014?

Well, we think we like to see what our customers’ forecasts. So as you know -- are for 2014. As you know, we work with GE and Millipore and Sigma-Aldrich and a number of other companies who will provide us their forecasts, and then we'll be able to give a much more precise guidance for 2014 in the first quarter. But as Bill said, there's no real deviation from plan here. We're going to be forecasting 10% to 15% revenue growth. I'm pretty confident of that. And as we work through our manufacturing plans to optimize efficiencies in manufacturing, which we've been doing since the summer, actually, we'll be more precise about where the gross margin, which is, of course, one of the biggest drivers of our overall performance, where that gross margin is likely to come out in 2014.

The next question comes from Michael Wood at LSA.

Walter and Bill, a couple of questions. First of all, I know you've talked in the past about plans for acquisitions. Can you give us an update there on what your activities?

Well, I guess I would, Michael, characterize it as active. We have active discussions -- are going on in the acquisition front. But as you know, one can never be certain when or how or if an acquisition will be completed. But our business development group has got some intermediate-stage discussions or early-stage discussions, and we may -- remain engaged and committed to growing not just by organic growth but by acquisition as well.

And also another question, there was a reference on the call earlier to the expansion of your direct marketing efforts in 2014 with the hiring of additional salespeople. Can you give us a little bit more detail on those activities and your plans there?

Well, as I heard you earlier, I think that there are a number of segments of the market where we can increase our impact. One obvious one is geographic. While we have a good presence on the West Coast and the Northeast corridor, in other geographic areas where there are big customers, we just have less of a presence. And so that an obvious step up now that we have increased confidence that our products are competitive and will be accepted by customers. And as one of the earlier questioners indicated, there are a lot of mid- and small-sized companies where we really don't have touch right now, many of whom are well resourced and could be potential customers for particularly growth factor and OPUS products. So both of those are segments where we think some increased work will yield results.

The next question comes from James Gowen at Kalmar Investments.

I wonder if you could just drill down a little more on the bioprocessing business as far as the mix as between Protein A, growth factor and chromatography. And just any comment on those relative growth rates, I guess, particularly versus your expectations?

Well, I think our expectations going into 2014 are consistent with what we've communicated in the past. We see the Protein A business as growing at -- over the next several years at a rate of about 8% or so, consistent with the expansion of the monoclonal market. It's been a little bit hotter than that in 2013. But really, where we think an equal amount of the growth will come from is expansion of OPUS in particular as we're starting to get some real traction there, as well as increased interest in the growth factor product. So those will both grow at rates faster, we would project, than the base Protein A business. And it's the blend of that, that makes us believe we can sustain the 10% to 15% organic growth Bill alluded to.

Great. And then just one other question on Protein A. Are all monoclonals created equal as far as their use of Protein A for those that use it in the process? Or for some reason, do some use a lot more of the product?

On an individual monoclonal basis, you mean?

Yes.

So definitely, that is the case. A monoclonal antibody for a chronic condition in which patients are dosed every 2 to 4 weeks, for example, for years on end will generate larger production volumes of that monoclonal and, therefore, correspondingly, larger demand for Protein A products than a monoclonal, for example, that's dosed once or twice a year. Some of the newer ones that we've seen are -- will be less. Over the years, that balance between the amount of monoclonal and the dollar revenue of the monoclonal market has remained fairly balanced. In other words, it's not like we're seeing a trend towards higher-dose monoclonals or lower-dose monoclonals. So there's been a distribution that's been very steady for many years. So we do think that revenue, therefore, is a good surrogate for overall growth of metric tons of antibody produced in the world.

Now we have another question from Drew Jones.

One last one. Last quarter, you talked about multi-column chromatography and a number of your customers investigating that and the potential there. Do you have any initial feedback from these customers yet?

No. We are engaged with what I would characterize as research programs. And so they are moving along. And in one case, I would expect we'll complete the 3-stage research project with a large biopharma company probably in mid-2014, and then we'll see what the next steps are. We have engaged a couple of other companies and begun discussions about initiating exactly such a research program where we can get our products into the labs earlier than commercialization decisions. So we're well positioned to -- if they do adopt multi-chromatography, well positioned to be the vendor of choice.

There are no further questions, gentlemen. So I'd now like to turn the call back over to Mr. Walter Herlihy for closing remarks.

I want to thank everyone for joining us on today's call. It's an exciting time here at the company. And if you have additional questions or comments, please feel free to contact Investor Relations at any time. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.