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Repligen Corporation (NASDAQ:RGEN)

Q1 2013 Earnings Conference Call

May 2, 2013 09:00 ET

Executives

Jonathan Lieber - Chief Financial Officer and Treasurer

Walter Herlihy - President and Chief Executive Officer

Analysts

Drew Jones - Stephens Inc.

Michael Wood - LSA

Larry Smith - SmithOnStocks.com

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2013 Repligen Corporation Earnings Conference Call. My name is Clinton, and I will be your coordinator for today. There will be a question-and-answer session towards the company’s – after the company’s formal remarks. (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.

Jonathan Lieber - Chief Financial Officer and Treasurer

Thank you, and good morning. The purpose of today’s call is to discuss our Q1 2013 results, 2013 financial guidance which remained unchanged, and first quarter business highlights. Joining me today on the call 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.

This morning, we reported results for the first quarter ending December 31, 2013. Before getting started, I wanted to point out that this is the first financial report for which both the current and preceding years periods reflecting acquisition of December 2011 Novozymes Biopharma AB, now Repligen Sweden AB. For the quarter, we reported bioprocessing product revenue of $11.9 million, an increase of 28% from the prior year. Bioprocessing revenue growth in the first quarter is driven by increased demand from individual products in all three of our product areas, Protein A, growth factors, and chromatography products.

Total revenue for the quarter, including royalty and research revenue, was $16.5 million, which also represented an increase of 28% over the prior year period. Net income for the quarter was $2.3 million, or $0.07 per diluted share, compared to a net income of $1.2 million, or $0.04 per share for the quarter ended March 31, 2011. Cash and marketable securities totaled $54 million, an increase of $4 million from December 31, 2012.

Our gross margins in the first quarter were approximately 42%. Gross margins in the first quarter were negatively impacted by the sale of higher cost material in our Swedish manufacturing facility that was produced in 2012, development work on the new ligand and (indiscernible), and normal variations in manufacturing yields. A higher comp inventory resulted in approximately $1.2 million of additional expense. And if the same goods were produced today at the same quantities, the majority of this higher cost inventory was sold as of the end of the first quarter with the remainder to be sold in the second and third quarters. As a result, we expect gross margins to rise over the remainder of the year as we dropped higher volumes to our Swedish facility and benefit from our cost reduction initiatives there.

Research and development expenses in the first quarter were $2.2 million versus $2.8 million in the first quarter of 2012. The decline was due to a reduction in R&D expenditures on our therapeutic programs. We expect to complete the transition of RG3039 to Pfizer in the second quarter and continue to seek licensing agreements for our other therapeutic candidates.

Selling, general, and administrative expenses in the first quarter decreased to $3.3 million from $3.4 million in the first quarter of 2012. Today, we are updating our financial expectations for 2013. We continued to expect total revenues of between $63 million and $65 million including bioprocessing product revenue of $46 million to $48 million. We continue to forecast gross margins of approximately 50% and operating income of between $20 million and $22 million in 2013 compared to $11.1 million in 2012.

We also forecast net income of $18 million to $20 million compared to $14.2 million in 2012, and we expect our year end cash to be approximately $65 million also consistent with our prior guidance. This guidance is based on expectations for existing business and does not include the impact on our revenue and expenses of potential milestone payments from Pfizer, additional outlicense agreements for our remaining clinical assets, potential bioprocessing acquisitions, or fluctuations in foreign currency exchange rates.

Now, I will turn the call over to Walt who will discuss first quarter business highlights.

Walter Herlihy - President and Chief Executive Officer

Thanks John. On our call in March, I communicated to you that we are working to expand our sales and marketing reach. To this end, we recently participated in several industry conferences, including a podium presentation in a bioprocessing conference in February highlighting how our OPUS line of pre-packed chromatography columns can improve the speed and economics of biologics manufacturing. We also initiated our first print advertising campaign to raise awareness of our OPUS pre-packed columns. These and other drugs sales activities have generated a significant increase in customer interest in this product line particularly from contract manufacturing organizations and large biopharmaceutical companies for production of clinical trial materials.

I also communicated in March that we were investing in five new products or line extensions. One of these programs is directed towards creating larger scale of OPUS purification columns with two to four times greater capacity. This program is in direct response to customer request based on the increasing scale of disposable fermentation facilities which then requires larger purification capacity. If our efforts are successful, we have an opportunity to be the first company into offer such a product.

Second, we are also about to launch a new kit for measuring the concentration of our IGF growth factor products in fermentation medium. And while this is not expected to be a large product itself it will enable customers to more easily optimize the use of our IGF-1 product is one of the fastest growing products in our portfolio. Third, we’ve also made good progress in active collaborations with two large companies for whom we are developing new chromatography products. For both projects we expect our R&D efforts will be substantially completed this quarter and we expect these products to be launched by our collaborators later this year or early 2014. For both products we have retained to find long-term manufacturing rights. We believe our continued investment in new products will enable us to sustain double-digit organic growth, which may then be supplemented by selective technology product or company acquisitions.

Turning now to our therapeutic assets in January we announced a worldwide licensing agreement with Pfizer for our spinal muscular atrophy program in alignment with our strategic goal to out license our portfolio of therapeutic assets. Under the terms of this agreement Repligen is entitled to receive from Pfizer up to $65 million in milestones as well as royalties on future sales. We have now completed the second cohort of active Phase 1 trials of the lead product candidate RG3039 positioning this program to be fully transitioned to Pfizer by the middle of this year. We also completed patient dosing in a Phase 1 trial of RG2833, our product candidate for Friedreich’s ataxia. We are currently collecting biomarker and pharmacology data from this trial which we expect to complete this quarter.

Finally, to supporting our partnering efforts, we have initiated our dialogue with the GI division of the FDA to determine if there is a streamline path to an initial approval of RG1068 for GI uses, which would complement our potential partners’ efforts to conduct the second Phase 3 trial in radiology. We expect additional feedback this quarter.

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 bio-manufacturing market. We believe that our focus on manufacturing efficiencies in our core Protein A business coupled with development of new franchises in growth factors in chromatography products will enable us to fully capitalize on the expanding markets for biological therapies and to build sustainable shareholder value over the long-term. We look forward to updating you on our progress.

I will now turn the call back over to the operator for our question- and-answer period.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from line of Drew Jones of Stephens Inc. Please proceed.

Drew Jones - Stephens Inc.

Good morning guys. Congrats on a great quarter.

Walter Herlihy

Hi, Drew.

Drew Jones - Stephens Inc.

I guess, just thinking about the growth by product here, obviously there was some good contribution from growth factor in the quarter. Can you talk a little bit about incremental wins and maybe the pipeline there that’s helping to drive that strength?

Walter Herlihy

Sure, Drew. I think at the end of that for all of our revenues I think we had good – we had good product growth and good revenue growth in selected areas across all three of our major product areas as we said is certainly off to a good start. We are excited about the growth factor. We think there is lot of opportunities there. I don’t think at this time we are prepared to talk about a specific customer orders, but what I can say is that the existing channels that we were selling through have been very receptive to that product and have driven most of the growth and data. I do think we see an opportunity potentially as the year progresses and in the out years to access some new markets and new distribution channels there, but we’ll have more to say about that later in the year. Overall, that we are pleased with the growth of that product this year – this quarter.

Drew Jones - Stephens Inc.

And as far as chromatography is concerned, you guys again alluded to good contribution in the quarter. Is that something that gets stronger as the year progresses?

Jonathan Lieber

No, I think it’s basically well above went on to this, but I think it’s generally driven by so, chromatography is a bunch of different products in it, we see some high growth opportunities for example like OPUS, which is doing very well, which was launched last year in the first quarter about last – few Februarys ago now. There are some other products that are also performing well. So, I think we see some good opportunity there as well.

Walter Herlihy

Yes, just to further add to Jon’s comments, we launched as you may recall the process scale OPUS chromatography columns at the end of February last year and takes about a year typically for the large companies due to a technical quality and supply chain evaluation of product offering and right on few this quarter we are seeing a significant uptake in both orders and customer increase, which have yet to turn into orders so, we do believe that the net line will benefit in the coming quarters from this period of evaluation, which is come to a close.

Drew Jones - Stephens Inc.

And it seems like growth factor and chromatography, the near-term outlook is so strong and you alluded to this in your prepared comments, but is it right to think that may be acquisitions are on the back burner for 2013 or…

Walter Herlihy

I wouldn’t say they are on the back burn, I think that you certainly have an active business development effort for acquisitions and may be company acquisitions, we are looking potentially at carve out, where we buy a singular product from a company, no longer fits with their strategic portfolio or deals that augment the return on an investment in our R&D, new product development efforts. We do believe that lot of organic growth drivers that can sustain us and that as we said in my prepared comments we believe that we can sustain that double-digit growth target and at any acquisitions we might make would – would just further raise our growth rate.

Drew Jones - Stephens Inc.

And then two quick ones, on an absolute dollar basis, R&D did tick up little bit year-over-year. Can you tell us what that was tied to?

Walter Herlihy

Actually I don’t think it picked up over a year-over-year and actually think so we were down about 700K actually year-over-year. So, what that reflects though just to answer the question as we hit higher than I think we expected to be for the remainder of the year is lower than it was prior quarter is of course prior year quarter we had a lot more therapeutic line of the activities taking place and we did this quarter. We did still as we mentioned in the script have couple of trials that we were conducting and finishing up in that first quarter so, I think R&D will decline as the year progresses certainly to meet our state of guidance for the year.

Drew Jones - Stephens Inc.

And then last one, just tax rate – just expectations for the year and what happened in the quarter?

Walter Herlihy

So, we are still comfortable with our approximately 10% effective rate for the year and although the effective tax rate represent the queue is higher, there were some one-time items in the first quarter that added about 30% to the tax provision in that quarter and this quarter and on the separate note, we may need to revisit a couple of items that could impact the effect of rate as the year progresses that will certainly depend on constant current and expected future profitability, but we would expect perhaps that could come down but we are reconfirming our approximately 10% effective rate guidance.

Drew Jones - Stephens Inc.

Thank you guys.

Operator

Thank you. The next question comes from the line of Michael Wood of LSA. Please go ahead.

Michael Wood - LSA

Good morning. Looking at your first quarter bio-processing revenue of $11.9 million, it looks like this was, I think, 28% higher over the same quarter in 2012. Now the guidance you have given for the year is $46 million to $48 million, which is a 10% to 15% increase year-over-year. How do you think we should be thinking about the remainder of 2013 for revenues?

Walter Herlihy

Thanks, Michael. Good question so, we are pleased that the year is off to a really, really strong start. As we have said previously, first of all still early in the year, so, that’s one thing. So, we have – when we have a good view of the year, I don’t know that that we were prepared to certainly raise guidance. And as we said before there can be quarterly fluctuations in revenue depending upon how our customers push in, pull in an order or push out an order. So, we’re going to be pleased with where we are, but we are sticking with our current guidance for the time being and what we evaluate that as the year progresses if necessary.

Michael Wood - LSA

Okay, great. Thanks. And one other question can you tell us are there any new developments in the monoclonal antibody that would give the company any new or different views on the growth that is happening in that sector?

Walter Herlihy

Michael that’s something that we certainly have had a long-term bullish view on, I think in the last two months since our last call the one thing that I would just note is the FDA has started exercising its ability to designate certain therapies for critical unmet medical needs so called breakthrough therapies. And we’ve seen a couple of breakthrough therapy designations by the FDA for monoclonals in particular Merck’s monoclonal, it’s been called anti-PD1 which is for solid tumors received breakthrough designation about a month ago. Today I saw on the Bloomberg that Genmab and Johnson & Johnson’s antibody they’re developing for multiple myeloma which is a blood cell type of cancer also received breakthrough designation and an analyst commented that they had the potential in his opinion to advance the launch day from 2017 to 2015. So, I think it’s very gratifying to see that the FDA has recognized the antibodies as the key class particularly for cancer and is exercising this regulatory discretion to speed these therapies to market which is going to be good for the overall antibody market.

Michael Wood - LSA

Okay, thanks. That’s a good observation. Thank you.

Operator

Thank you. And the next question comes from the line of Larry Smith with SmithOnStocks.com. Please proceed.

Larry Smith - SmithOnStocks.com

Hi, I wonder if you could give us the approximate growth rates of Protein A product from the first quarter, other chromatography products and their growth factors year-over-year?

Walter Herlihy

Hi, Larry thanks for that question. I think right now we were not prepared to necessarily give breakdowns by product for the first quarter. It is something we will consider doing as the year progresses. I think generally we are very comfortable with the guidance we’ve given for total bioprocessing revenue for the year. But because of the various fluctuations and candidly the size of an individual order relative to a product line and the total, we’re not quite ready yet to sort of give to talk about an individual product offerings either for the quarter or for the year. So we do – we stay in tune with them, I mean I think like I said some things we move up and down quarter-to-quarter, but we’re still very comfortable with our original revenue guidance and then bioprocessing revenue $46 million to $48 million.

Larry Smith - SmithOnStocks.com

Were there any unusual orders in the quarter that might have influenced the first quarter results?

Walter Herlihy

Well, I wouldn’t say unusual as I said mentioned in the prepared remarks and in response to the previous question. We anticipate that it would take about a year of incubation for the OPUS process scale columns to work their way through the normal evaluation process at any pharmaceutical company would do before bringing a new product into their GMP manufacturing suite. And we just hit that one year point and so that was definitely something that we saw a benefit from in the first quarter I probably anticipated but certainly gratifying to see.

Larry Smith - SmithOnStocks.com

Okay. And most of us don’t have a lot of detailed experience on what the growth factor market is like. Could you give us an idea of the dynamic and as you try to compete or tried to replace insulin as a growth factor, I presume that existing companies are not even going to contemplate making a change and you are competing with - for business on new product. If that is correct, could you give us just an idea of the dynamics of creating orders for your growth factor product?

Walter Herlihy

Sure, so you’re correct. Once a product and antibody for example is in commercial manufacturing the growth factor that might have been incorporated through that product tends to not change over time. And so we are certainly focusing our sales and marketing efforts on process development laboratories people who are our processes that are in early stage of Phase 1 or Phase 2 clinical development because that when there is more flexibility to choose growth factors and really our landscape is pretty simple in the growth factors area. Insulin is by far the dominant growth factor provided by Novo in Denmark is a dominant growth factor because it’s been available for many decades in pure, stable form from a company that has a long-term track record so, the default choice by many companies. But we think our product has some technical attributes that will allow us to gaze share on insulin.

It is as I think we’ve discussed several 100 times more potent than insulin and that creates some logistical advantages for the – for mutation processes incorporating our growth factor so, that’s one element to what the second element to the market is despite the fact that we have only about 10% market share relative to insulin the – there are several large pharma companies that have incorporated our growth factors into products and some of those commercial products are very robust probably which is causing additional pull through for our demand for our IGF-1 product.

Larry Smith - SmithOnStocks.com

Okay, thank you.

Operator

Thank you, sir. At this time, we have no questions. (Operator Instructions) Thank you. I would now like to turn the call over to Walt Herlihy for closing remarks.

Walter Herlihy - President and Chief Executive Officer

Okay, well, thanks everyone for participating in today’s call. And as always, if you think of additional questions or comments, feel free to communicate directly with us through Investor Relations. Thank you.

Operator

Thanks for joining in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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