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Repligen (NASDAQ:RGEN)

Q4 2013 Earnings Call

March 06, 2014 9:00 am ET

Executives

William J. Kelly - Chief Accounting Officer

Walter C. Herlihy - Chief Executive Officer, President, Director and Chairman of Science & Technology Committee

Analysts

Andrew L. Jones - Stephens Inc., Research Division

Michael Wood - LifeSci Advisors, LLC

Operator

A very good day to you, ladies and gentlemen, and welcome to Repligen Corporation's Fourth Quarter and Year 2013 Earnings Conference Call. My name is Nancy, and I will be your coordinator. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. [Operator Instructions] I would now like to turn the call over to your host, Mr. William Kelly, Chief Accounting Officer for Repligen. Please proceed. Thank you.

William J. Kelly

Thank you, and good morning. The purpose of today's call is to discuss our fourth quarter and full year 2013 results, to provide financial guidance for the year 2014 and to discuss recent business highlights. 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.

This morning, we reported results for the fourth quarter and year ended December 31, 2013. For the year, our bioprocessing product revenue was $47.5 million, an increase of 13.5% versus 2012. Our royalty and other revenue was $20.7 million, bringing total revenue to $68.2 million, an increase of $5.9 million or 9.5% versus 2012.

For the fourth quarter of 2013, we recorded bioprocessing product revenue of $10.4 million, an increase of approximately 7% from the prior year. Total revenue for the fourth quarter, including royalty and research revenue, was $15.4 million, a decrease of $3.4 million from the fourth quarter of 2012, in which royalty and research revenue included $5 million from the license of our SMA program to Pfizer.

For the year 2013, our gross margin on product sales was 52.7%, a significant increase from 40.3% in 2012. This improvement was the result of a restructuring of operations at our Swedish facility in mid-2012, coupled with greater production volumes in 2013 that improved our capacity utilization. Our product margins have also benefited from manufacturing process improvements that have increased our product yields and from the initiation of a competitive sourcing program that resulted in lower costs for several key raw materials.

The combination of higher product sales and improved gross margin in 2013 resulted in an increase in the gross profit derived from bioprocessing products, from $16.9 million in 2012 to $25 million in 2013, an increase of $8.1 million or 48%.

Research and development expenses in 2013 were $7.3 million versus $10.5 million in 2012. The decline is primarily due to a reduction in R&D expenditures on our therapeutic programs, partially offset by higher spending on bioprocessing R&D in connection with new product development.

Selling, general and administrative expenses in 2013 were $12.7 million, a decrease from $13.2 million in the previous year, during which we discontinued our therapeutic-related marketing activities and had higher transaction-related expenditures. This decrease was partially offset by increased 2013 expenditures related to headcount as we increase our sales and marketing efforts.

The growth in revenue, combined with the improvement in margins and lower operating expenses, resulted in an increase in operating income to $22.9 million for 2013. This compares to operating income of $11.1 million for 2012, which included the $5 million upfront payment from Pfizer.

Income tax expense in 2013 was approximately $6.9 million, which represents an effective tax rate of 30.1%. Our reported tax rate is the net effect of the statutory tax rates in the jurisdictions in which we do business -- the U.S. and Sweden -- adjusted for certain discrete items, such as onetime tax assessments we may receive or the benefit we derive from utilizing our net operating losses to lower our cash tax liability.

In the fourth quarter, the company recorded an $800,000 provision to reflect increased uncertainty regarding whether certain historical R&D tax credits will ultimately prevail under an ongoing audit. Further, as you may recall in 2012, the company appropriately recognized a $3 million tax benefit associated with the planned use of our accumulated net operating losses to reduce future tax -- future cash taxes due on 2013 earnings. Adjusting for these 2 discrete items, our normalized tax rate is about 14%, and our cash taxes due are approximately $3 million.

Net income for 2013 was $16.1 million, compared to net income of $14.2 million in 2012. Cash and marketable securities totaled $73.8 million at the end of the third quarter, an increase of $24 million from December 31, 2012.

Today, we are providing our financial expectations for 2014. We expect total revenues of between $54 million and $57 million, which includes $52 million to $55 million of product sales, an increase of approximately 10% to 15% from 2013. We also expect to record $2 million of other revenue in the first quarter, reflecting the upfront payment we received from BioMarin in conjunction with the recently announced transaction on our HDAC therapeutic development program. We expect bioprocessing product margins of approximately 53%, which is consistent with our longer-term goal to increase gross margins to 55%. We anticipate R&D expenses of approximately $5 million, exclusively focused on our bioprocessing business.

Our SG&A expenses are expected to be $14 million to $15 million as we continue to increase bioprocessing sales and marketing expenditures to drive top line growth and increase headcount to support the business. Operating income is projected to be between $10 million and $12 million for 2014. We expect that our effective U.S. GAAP tax rate and cash taxes due for 2014 will be between 24% and 28% of pretax income, driven primarily by increased profitability in our Swedish subsidiary, which of course cannot benefit from our U.S. net operating losses. Our net income, therefore, is projected to be between $7 million and $9 million.

Capital expenditures are forecast to be approximately $4.5 million, which consist of approximately $3 million to expand our Waltham, Massachusetts facility by 20,000 square feet and $1.5 million for maintenance of existing facilities and equipment. The facility expansion will allow us to consolidate all of our Waltham-based employees into a single facility and to close our second Waltham facility in 2015.

Based on the above, we're expecting year-end cash of between $84 million and $87 million.

Our guidance is based on expectations for our bioprocessing business and does not include the potential impact on our revenue and expenses of milestone payments from Pfizer or BioMarin, bioprocessing acquisitions or fluctuations in foreign currency exchange rates.

To summarize, we have had a very strong year, highlighted by increased bioprocessing product revenue, dramatically improved gross margins and significant cash flow.

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

Walter C. Herlihy

Thanks, Bill. I would just like to add that our confidence in our 2014 guidance is bolstered by the fact that we're off to a very fast start to the year and expect record product sales in the first quarter. I would now like to provide additional color on growth opportunities in our 3 product groups, starting with our Protein A business.

We currently manufacture 7 distinct Protein A affinity ligands, which we sell to large life sciences companies to make Protein A media. In the past 2 years, we have completed 2 funded collaborations to develop new affinity ligands, diversifying our offering. These 2 ligands are now incorporated into new media products sold by our partners. In 2014, we expect that these recently launched products will contribute incremental revenue of between $1 million and $2 million. Both have strong growth potential over the next few years and affirm our leadership in this business segment.

Turning now to our growth factor product group. For our lead growth factor product, LONG R3 IGF-1, we've been working with our distribution partner, Sigma-Aldrich, to gain better visibility into future growth potential at the level of end users. We are now aware that some of the recent growth for IGF-1 has been driven by its use in the production of clinical materials for several mid- and late-stage clinical products. If one or more of these products is ultimately approved by the FDA and successfully launched, it could significantly increase demand for our IGF-1 product.

In our chromatography products group, we expect sales of OPUS Pre-Packed Columns to grow by 50% to 100% in 2014. Part of this growth will come from a new 45-centimeter diameter OPUS column that we plan to launch later this month. This product has greater capacity than any competitive product on the market and was developed based on requests from customers who are running larger fermentations in their bio [ph] plants, which then require larger columns for product purification.

Since October of 2013, we have recorded 3 important milestones for OPUS. We've made the first sales of our 45-centimeter columns even before their formal commercial launch. Second, we made the first sale of a set of process scale columns to a contract manufacturing organization working for a customer outside the United States and Europe. This supports our belief that in-country manufacturing in rest of world markets could increase the demand for the largest OPUS columns. And third, we made the first sale of process scale columns containing a Repligen proprietary Protein A media, which allowed us to capture the margin on both the OPUS column and the media inside.

Some of our current R&D efforts are directed to developing additional media that we can sell in OPUS columns. While these are early singular examples, they exemplify some of the potential drivers of further growth of OPUS.

Since our shift to bioprocessing in August of 2012, we have sought to bolster our internal expertise and to out-license our therapeutic programs. In November, John Cox joined our board. John is the Executive Vice President of Pharmaceutical Operations and Technology for Biogen Idec, a leading developer of biologic drugs. John has already made a positive impact on the company, and we look forward to his continuing contributions.

In January, we announced that BioMarin Pharmaceuticals had acquired our HDAC inhibitor therapeutic development program, for which the leading clinical indication is Friedreich's ataxia. As noted, we received a $2 million upfront payment and are eligible for up to $116 million in milestone payments based on the development and commercialization of multiple products based on our technology. We are also eligible for royalties on sales of therapeutic products originating from the HDAC portfolio. We are pleased to have secured a world-leading developer of orphan drugs to carry this program forward while we focus on our bioprocessing business. This transaction completes our exit from therapeutic drug development.

Finally, we continue to be excited about the dynamic progress of the monoclonal antibody pipeline in 2013, for which there continues to be a steady stream of positive clinical data. To view the latest monoclonal antibody news, follow our Twitter feed, which can be accessed from our website.

In summary, 2013 was a breakout year for Repligen. We achieved significant top line growth and dramatic gains in gross margin, which, when coupled with expense reductions, drove strong gains in operating income and cash flow. Equally important, we generated increased customer interest in some of our newer proprietary products, which have the potential to drive future growth. With the completion of our exit from therapeutic drug development, we are now a focused bioprocessing company, with the products and resources to continue to build value for our customers and our shareholders. I look forward to updating you on our progress throughout 2014.

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

Question-and-Answer Session

Operator

[Operator Instructions] We have our first question in the queue from the line of Drew Jones from Stephens Inc.

Andrew L. Jones - Stephens Inc., Research Division

Walt, you talked a little bit about growth factor and the fact that you guys are in some late-stage clinical trials. Do you have any visibility as to whether or not any of those trials are related to a PCSK9 product?

Walter C. Herlihy

Well, we certainly have seen some evidence that the growth factor is incorporated in the pipeline. Probably, Drew, I would be reluctant to comment on specific products or specific companies, since obviously, this is corporate information. But I guess the point I wanted to emphasize that is -- new information here is that clearly we're incorporated in one of the legacy blockbusters. We're incorporated in a recently launched commercial product. And now that we know we're incorporated in the late-stage clinical area, our job is to continue to just fill those early-stage projects, those Phase I to Phase II projects as well. I think that really portends well for the next 5 years of sustained growth for this product.

Andrew L. Jones - Stephens Inc., Research Division

And is it -- I know Amgen has been a great user of IGF in the past. Are there new users that are coming on board?

Walter C. Herlihy

We think so. It's -- we have partial information, but we do believe that there are additional companies who are experimenting, albeit, at fairly low volumes right now with IGF-1 in their development programs. Some of those companies are buying the IGF-1 directly. Others are buying it in preformulated media from Sigma-Aldrich, our partner.

Andrew L. Jones - Stephens Inc., Research Division

The media opportunity, I feel like it's something that we haven't really fully appreciated. Could you maybe firm up the products that are coming out a little bit this year and the product opportunities that you expect to -- market opportunities you expect to be able to attract over the next 12 to 24 months, kind of where it fits into the process?

Walter C. Herlihy

So I assume you're referring to the chromatic graphic media I alluded to for the OPUS columns. And so after the introduction of the large OPUS column later this month, we hope to, sometime towards the end of 2014, introduce additional chromatographic media that we could also sell on OPUS columns, much as we have with one of our legacy media products in the past quarter. It will be no surprise to you that Protein A media will be the top of our list of the types of different media we might want to develop and begin to sell in certain discrete segments of the customer base that are particularly value oriented. And the overall estimates, worldwide estimates, from third parties on the size of the Protein A market are between $300 million and $400 million per year. That's all Protein A media. So that's the market segment we hope to begin playing in, in 2015.

Andrew L. Jones - Stephens Inc., Research Division

And then, I guess, my last one is on OPUS. Can you talk a little bit about -- I know in the past you've said you've had 5 blue-chip customers with recurring -- placing recurring orders. Is that number still the same? Is it growing? Can you just -- kind of a feel for what the end market look like there.

Walter C. Herlihy

Yes, I think it is incrementally growing. I can't give an exact number, but I do know that we are in active discussions with more than 20 companies right now, whether it's a singular product or their first order or their repeat order, all sort of recognizable biotech or pharmaceutical companies. So we see the customer base broadening out. That's certainly one of the things that's going to drive the anticipated growth in 2014 as our message gets into additional customer laboratories and development plans.

Operator

We have our next question from the line of Michael Wood from LSA.

Michael Wood - LifeSci Advisors, LLC

One of the things you've talked about in the past is the trend towards factories of the future or flexible factories that you're seeing in biopharma manufacturing. Can you expand on this and let us know what it means for Repligen and what opportunities there might be here?

Walter C. Herlihy

I think for just -- to back up for a second and define factory of the future, we see an opportunity in this transition that is beginning to occur in pharmaceutical bio production where steel, hard-plumbed factories are being replaced by plug-and-play, single-use, plastic disposable components. And the feedback we have from customers is that OPUS may be a perfect fit for a factory of the future-type manufacturing, given that we are able to offer customers the broadest range of sizes and media, and in a size that fits well with desires of customers to potentially replace single, large chromatographic columns with arrays of smaller OPUS-sized columns. So we see that as very much a fit. It's not that we need to develop a factory of the future to grow the OPUS business; it could fit quite well in existing factories, but we see that as a long-term growth opportunity. And it's certainly directed our M&A and internal product development thinking as to how else could we exploit this paradigm shift, which will take place over the next decade, and get out in front of that, and provide other types of products that could be used in that type of environment.

Operator

[Operator Instructions] We have Drew Jones on line next.

Andrew L. Jones - Stephens Inc., Research Division

Walt, one more question on the PCSK9 front that seems to be getting a lot of publicity right now. Can you talk a little bit about the expected lead times for Protein A and just the difference in Protein A consumption for that particular monoclonal versus those that already exist? Is it significantly different?

Walter C. Herlihy

Well, the -- we don't know, of course, what -- how many metric tons ultimately of PCS -- assuming it is approved by the FDA and successful -- how many metric tons will be ultimately required at peak market. But it's quite clear that the patient population for PCSK9, which is targeting elevated cholesterol, is far larger than any patient population that's, to-date, been treated with a monoclonal antibody -- far larger than rheumatoid arthritis, any of the cancer niches that have been driving the business so far. So I don't believe there's any reason to suspect that there isn't going to be a linear relationship to the extent the world metric tonnage of antibodies produced is increased by PCSK9, that it won't also be reflected in our output.

Andrew L. Jones - Stephens Inc., Research Division

And just for fun, would it be a similar impact to growth factor that you would see on Protein A, or is there anything we're missing as far as the consumption of growth at the front end?

Walter C. Herlihy

No. The consumption is fairly linear, whether it's a Protein A resin, a growth factor or a chromatographic media. It's fairly linear with product output, so I think that's a pretty solid correlation.

Operator

[Operator Instructions]

William J. Kelly

Okay. I would like to thank everyone for participating on today's call. And as always, if you have follow-up questions, feel free to contact the company directly. Thank you.

Operator

Thank you. Ladies and gentlemen, that concludes your call for today. You may now disconnect. Thank you all for joining. Have a great day ahead.

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