Repligen and its subsidiaries, collectively doing business as Repligen Corporation (“Repligen”, “we”, “our”, or “the Company”) is a global life sciences company that develops and commercializes highly innovated bioprocessing technologies and systems that increase efficiencies and flexibility in the process of manufacturing biological drugs.
As the overall market for biologics continues to grow and expand, our customers – primarily large biopharmaceutical companies and contract development and manufacturing organizations – face critical production cost, capacity, quality and time pressures. Built to address these concerns, our products are helping to set new standards for the way biologics are manufactured. We are committed to inspiring advances in bioprocessing as a trusted partner in the production of critical biologic drugs – including monoclonal antibodies (“mAb”), recombinant proteins, vaccines and gene therapies – that are improving human health worldwide.
We currently operate as one bioprocessing business, with a comprehensive suite of products to serve both upstream and downstream processes in biological drug manufacturing. Building on over 35 years of industry expertise, we have developed a broad and diversified product portfolio that reflects our passion for innovation and the customer-first culture that drives our entire organization. We continue to capitalize on opportunities to maximize the value of our product platform through both organic growth initiatives (internal innovation and commercial leverage) and targeted acquisitions.
Our bioprocessing business is comprised of four main franchises, three of which we sell directly to
end-users
(Chromatography, Filtration and Process Analytics) and one that we sell through supply agreements (Proteins).
Direct-to-Customer
Products
Since 2012, we have significantly expanded our
direct-to-customer
presence through our Chromatography, Filtration and Process Analytics franchises, each of which includes novel and differentiated technologies. We have diversified and grown our
direct-to-customer
product offering through internal innovation and through strategic, accretive acquisitions of assets or businesses that leverage existing product lines and/or expand our customer and geographic scope.
To support our sales growth goals for these products, we make ongoing investments in our commercial organization, our research and development (“R&D”) team and our manufacturing capacity. Our commercial and R&D teams work together to develop and launch new products and applications that address specific biomanufacturing challenges, and to build new markets for acquired technologies. We have six key manufacturing sites across the United States, Sweden and Germany, with additional capacity being added by the end of 2020 in the Netherlands. We regularly evaluate and invest in capacity as needed to ensure timely deliveries and to stay ahead of increased customer demand for our products.
A substantial piece of our revenue comes from consumable and/or single-campaign
(“single-use”)
products as compared to associated equipment. The customization, scalability and
plug-and-play
convenience of consumable and/or
single-use
products, and in many cases the closed nature of our technologies, make them ideal for use in biologics manufacturing processes where contamination risk is a critical concern of our customers.
Our Chromatography franchise includes a number of products used in downstream purification, development, manufacturing and quality control of biological drugs. The main driver of growth in this portfolio is our OPUS
®
Column product line.
Additional chromatography products include our affinity capture resins, such as CaptivA
®
Protein A Resins, that are used in a small number of commercial drug processes and our ELISA test kits, used by quality control departments to detect and measure the presence of leached Protein A and/or growth factor in the final product.
Our Chromatography franchise features a wide range of OPUS columns, which we deliver to our customers sealed and
pre-packed
with their choice of resin. These are
single-use
or
multiple-use
disposable columns that replace the use of customer-packed glass columns used in downstream purification processes. By designing OPUS columns to be a technologically advanced and flexible option for the purification of biologics from process development through clinical and commercial-scale manufacturing, Repligen has become a leader in the
pre-packed
column (“PPC”) market. Our biomanufacturing customers value the significant cost savings that OPUS columns deliver by reducing set up time, labor, equipment and facility costs – in addition to delivering product consistency and “plug and play” convenience.
We launched our first production-scale OPUS columns in 2012 and have since added larger diameter options that scale up to use with 2,000 liter bioreactors. Our OPUS 80R column is the largest available PPC on the market for use in late-stage clinical or commercial purification processes. We have also introduced next-generation features such as a resin recovery port on our larger columns, which allows our customers to remove and reuse the recovered resin in other applications. We believe the OPUS
5-80R
product line is the most flexible and platformable PPC product offered in the marketplace today, and is serving the purification needs of customers manufacturing monoclonal antibodies (“mAb”) and other biologics such as cell and gene therapies (“C>”).
In addition to our larger scale OPUS columns, our portfolio includes our smaller-scale OPUS columns, including specifically RoboColumn
®
, MiniChrom
and ValiChrom
columns for process development and validation. These columns are used in high-throughput process development screening, viral clearance validation studies and scale down validation of chromatography processes.
We maintain customer-facing centers in both the United States and Europe for OPUS columns, and offer our customers an unmatched ability to pack any of over 100 resins in our OPUS
5-80R
range and any of over 300 resin choices in our small-scale OPUS columns.
Our Chromatography portfolio also includes ELISA kits, which are analytical test kits to quantitate the proteins and growth factors, and chromatography resins, including our CaptivA brand.
XCell ATF
Cell Retention Systems
Our Filtration products offer a number of advantages to manufacturers of biologic drugs and are used in development, clinical and commercial-scale production. We first moved into Filtration technology with our acquisition of XCell Alternating Tangential Flow (“ATF”) assets from Refine Technology (“Refine”) in 2014. XCell ATF systems are used primarily in upstream perfusion (continuous) cell culture processing.
XCell ATF is a cell retention technology. The system is comprised of an advanced hollow fiber (“HF”) filtration device, a low shear pump and a controller. The XCell ATF system is connected to a bioreactor and enables the cell culture to be run continuously, with cells being retained in the bioreactor, fresh nutrients (cell culture media) being fed into the reactor continuously and clarified biological product and cell waste being removed continuously. The cells are maintained in a consistent nutrient-rich environment and can reach cell densities
two-
and three-times higher than those achieved by standard
fed-batch
culture. By continuously removing waste products from the fermenter, the XCell ATF systems routinely increases cell densities to
two-
or three-times the levels achieved by standard
fed-batch
culture. As a result, product yield is increased, which improves facility utilization and can reduce the size of a bioreactor required to manufacture a given volume of biologic drug product. XCell ATF systems are available in a wide range of sizes that can easily scale from laboratory use through full production with bioreactors as large as 5,000 liters.
Through internal innovation, we developed and launched
single-use
formats of the original stainless steel XCell ATF devices to address increasing industry demand for
single-use
sterile systems with
“plug-and-play”
technology. The XCell ATF device is now available to customers in both its original configuration (steel housing and
single-use
filters) in all sizes (2, 4, 6 and 10), and/or as a
single-use
device (disposable housing/filter combination) in most sizes (2, 6, and 10). The availability of XCell ATF technology in a
single-use
format eliminates the time intensive workflow associated with autoclaving, leading to an 80% reduction in implementation speed. The
single-use
format also enables our customers to accelerate evaluations of the product with a lower initial overall cost of ownership.
In September 2018, we entered into a collaboration agreement with industry leader Sartorius Stedim Biotech (“SSB”) to integrate our XCell ATF controller technology into SSB’s BIOSTAT
®
STR large-scale,
single-use
bioreactors, to create novel perfusion-enabled bioreactors.
TangenX
Flat Sheet Cassettes
In December 2016, we acquired TangenX
Technology Corporation (“TangenX”), balancing our upstream XCell ATF systems with a portfolio of flat-sheet tangential flow filtration (“TFF”) cassettes used in downstream biologic drug concentration and formulation processes. The TangenX product portfolio includes our
single-use
SIUS
brand, providing customers with a high-performance, cost saving alternative to reusable TFF cassettes.
TFF is a rapid and efficient method for the concentration and formulation of biomolecules that is widely used in many applications in biopharmaceutical development and manufacturing. SIUS cassettes are the only purpose built
single-use
TFF cassettes on the market. The cassette features a high performing membrane and unique cartridge construction that enables a lower price point. Each disposable cassette is delivered
pre-sanitized
and ready to be equilibrated and used for tangential flow, ultrafiltration and diafiltration applications. Use of SIUS TFF cassettes eliminates
non-value
added steps of cleaning, testing between uses, storage and flushing required in reusable TFF products, providing cost and time savings. The cassettes are interchangeable with filter hardware from multiple manufacturers, simplifying customer trial and adoption of SIUS products.
We acquired Spectrum Life Sciences LLC (“Spectrum”) and its subsidiaries in August 2017 to strengthen our filtration business with the addition of a leading portfolio of HF filtration solutions, including fully integrated KrosFlo
®
TFF Systems with Konduit sensing and ProConnex
®
Flow Path
single-use
assemblies. KrosFlo family of TFF systems for product concentration is fully scalable from 2 milliliters to 5,000 liters – from
lab-scale
to commercial manufacturing. Designed for purification and formulation applications, KrosFlo Systems enable robust downstream ultrafiltration and microfiltration.
We also gained the Spectra/Por
®
portfolio of laboratory and process dialysis products and in 2019, we launched the SpectraFlo
Dynamic Dialysis Systems. Also, in 2019 we introduced the KrosFlo
®
TFDF
(Tangential Flow Depth Filtration) Systems, which we believe have the potential to disrupt and displace traditional harvest clarification operations. The KrosFlo TFDF system includes control hardware, novel high throughput tubular depth filters and ProConnex
single-use
TFDF flow paths. When used for cell culture clarification,
single-use
KrosFlo TFDF technology delivers unprecedented high flux (>1,000 LMH), high capacity, low turbidity, and minimal dilution, making the technology a high-performance alternative to traditional centrifugation and depth filtration approaches to harvest clarification. TFDF technology also provides benefits such as low
hold-up
volume, high recovery, small footprint, simple set up and disposal, scalability and reduced process time.
The Spectrum product line of HF filters is used in
bench-top
through commercial-scale processes, primarily for the filtration, purification and concentration of biologics and diagnostic products. Our KrosFlo filtration systems and equipment offer both standard and customized solutions to bioprocessing customers, with particular strength in consumable and
single-use
offerings.
With the acquisition of Spectrum, we substantially increased our direct sales presence in Europe and Asia, and we diversified our end markets to include all biologic classes, including mAb, vaccines, recombinant proteins and gene therapies.
In 2018, we introduced our Konduit monitor to automate concentration and buffer exchange. We have broadened the application for Konduit monitor to include use with both HF TFF from Spectrum and our TangenX flat sheet TFF systems. We also self-manufacture HF filters that are used in our XCell ATF, KrosFlo TFF and KrosFlo TFDF systems.
Process Analytics Products
In May 2019, we consummated our acquisition of C Technologies, Inc. (“C Technologies”) and added a fourth franchise, Process Analytics, to our bioprocessing business. Our Process Analytics products complement and support our Filtration, Chromatography and Proteins franchises as they allow
end-users
to make
at-line
or
in-line
absorbance measurements allowing for the determination of protein concentration in filtration, chromatography formulation and fill-finish applications.
Our SoloVPE Slope Spectroscopy
®
system is the industry standard for offline and
at-line
absorbance measurements for protein concentration determination in process development, manufacturing and quality control settings.
Our FlowVPE Slope Spectroscopy system enhances the power of Slope Spectroscopy and provides
in-line
protein concentration measurement for filtration, chromatography and fill-finish applications. A key benefit of this
in-line
solution is the ability to monitor a manufacturing process in real time. We are developing a next-generation FlowVPE to incorporate
GMP-compliant
software for production-scale biologics manufacturing.
Use of VPE Slope Spectroscopy delivers multiple process benefits for our biopharmaceutical manufacturing customers, compared to traditional
UV-Vis
approaches. Key benefits include: the elimination of manual dilutions and sample transfers from process development/manufacturing to labs, rapid time to results (minutes versus hours), improved precision,
built-in
data quality for improved reporting and validation, and ease of use.
Our OEM products are represented by our Protein A affinity ligands, which are a critical component of Protein A chromatography resins used in downstream purification of mAb, and cell culture growth factor products, which are a key component of cell culture media used in upstream bioprocessing to increase cell density and improve product yield.
Through our Proteins business, we are a leading provider of Protein A affinity ligands and cell culture growth factors to life sciences companies. Protein A ligands are an essential “binding” component of Protein A affinity chromatography resins used in the purification of virtually all monoclonal antibody-based drugs on the market or in development. We manufacture multiple forms of Protein A ligands under long-term supply agreements with major life sciences companies including GE Healthcare (“GE”), MilliporeSigma and Purolite Life Sciences (“Purolite”), who in turn sell their Protein A chromatography resins to end users (mAb manufacturers). We have two manufacturing sites supporting overall global demand for our Protein A ligands: one in Lund, Sweden and another in Waltham, Massachusetts.
Protein A chromatography resins are considered the industry standard for purification of antibody-based therapeutics due to the ability of the Protein A ligand to very selectively bind to or “capture” antibodies from crude protein mixtures. Protein A resins are packed into the first chromatography column of typically three columns used in a mAb purification process. As a result of Protein A’s high affinity for antibodies, the mAb product is highly purified and concentrated within this first capture step before moving to polishing steps.
In June 2018, we entered into an agreement with Navigo Proteins GmbH (“Navigo”) for the exclusive
co-development
of multiple affinity ligands for which Repligen holds commercialization rights. We are manufacturing and have agreed to supply the first of these ligands,
NGL-Impact
®
A, exclusively to Purolite, who will pair our high-performance ligand with Purolite’s agarose jetting base bead technology used in their Jetted A50 Protein A resin product. We also signed a long-term supply agreement with Purolite for
NGL-Impact
A and potential additional affinity ligands that may advance from our Navigo collaboration. The Navigo and Purolite agreements are supportive of our strategy to secure and reinforce our Proteins franchise.
Most biopharmaceuticals are produced through an upstream mammalian cell culture process. In order to stimulate increased cell growth and maximize overall yield from a bioreactor, manufacturers often add growth factors, such as insulin, to their cell culture media. Our cell culture growth factor additives include LONG
R
3
IGF 1 (“LR3”), our insulin-like growth factor that has been shown to be up to 100 times more biologically potent than insulin (the industry standard), thereby increasing recombinant protein production in cell culture fermentation applications. LR3 is currently sold through a distribution partnership with MilliporeSigma.
C Technologies Acquisition
On April 25, 2019, we entered into a Stock Purchase Agreement (“Purchase Agreement”) with C Technologies, Inc. (“C Technologies”), a New Jersey corporation, and Craig Harrison, an individual and sole stockholder of C Technologies. The deal was consummated on May 31, 2019, the acquisition date (the “C Technologies Acquisition”).
C Technologies sells instruments, consumables and accessories that are designed to allow bioprocessing technicians to measure the protein concentration of a liquid sample using C Technologies’ Slope Spectroscopy
®
method, which eliminates the need for manual sample dilution. C Technologies’ lead product, the SoloVPE
®
Device, was launched in 2008 for
off-line
and
at-line
protein concentration measurements conducted in quality control, process development and manufacturing labs in the production of biological therapeutics. C Technologies’ FlowVPE
®
Device, an extension of the SoloVPE technology, was designed to allow end users to make
in-line
protein concentration measurements in filtration, chromatography and fill-finish applications, designed to allow for real-time process monitoring.
Critical Accounting Policies and Estimates
A “critical accounting policy” is one which is both important to the portrayal of our financial condition and results and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. For a description of our critical accounting policies that affect our more significant judgments and estimates used in the preparation of our consolidated financial statements, refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations and our significant accounting policies in Note 2 to the consolidated financial statements included in our Annual Report on Form
10-K
for the year ended December 31, 2019 filed with the SEC.
We did not observe significant impacts on our results of operations for the three months ended March 31, 2020 due to the global outbreak of novel strain of coronavirus,
SARS-CoV-2,
which causes coronavirus disease 2019
(“COVID-19”).
The ultimate impacts of
COVID-19
on our business and results of operations are currently unknown. We expect to continue to actively monitor the situation and may take further precautionary and preemptive actions as may be required by federal, state or local authorities or that we determine are in the best interests of public health and safety and that of our patient community, employees, partners, suppliers and stockholders. We cannot predict the effects that such actions, or the impact of
COVID-19
on global business operations and economic conditions, may have on our business or strategy, including the effects on our financial and operating results.
The following discussion of the financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements and the related footnotes thereto.
Total revenue for the three months ended March 31, 2020 and 2019 were as follows:
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| | (Amounts in thousands, except for percentage data) | |
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| | $ | | | | $ | | | | $ | | | | | | % |
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Since 2016, we have been increasingly focused on selling our products directly to customers in the pharmaceutical industry and to our contract manufacturers. Direct sales represent approximately 76% and 73% of our product revenue in the three months ended March 31, 2020 and 2019, respectively. We expect that direct sales will continue to account for an increasing percentage of our product revenues, as the largest customer of our OEM products has begun to diversify its supply chain in 2020. Sales of our bioprocessing products can be impacted by the timing of large-scale production orders and the regulatory approvals for such antibodies, which may result in significant quarterly fluctuations.
Revenue from our chromatography products includes the sale of our OPUS chromatography columns, chromatography resins and ELISA test kits. Revenue from our filtration products includes the sale of our XCell ATF systems and consumables, KrosFlo filtration products and SIUS filtration products. Revenue from protein products includes the sale of our Protein A ligands and cell culture growth factors. Revenue from our Process Analytics products includes the sale of our SoloVPE and FlowVPE systems and consumables. Other revenue primarily consists of revenue from the sale of our operating room products to hospitals as well as freight revenue.
During the three months ended March 31, 2020, product revenue increased by $15.4 million, or 25.5%, as compared to the same period of 2019. The increase is due to the continued adoption of our products by our key bioprocessing customers, particularly our chromatography and filtration products. Sales of our bioprocessing products are impacted by the timing of orders, development efforts at our customers or
end-users
and regulatory approvals for biologics that incorporate our products, which may result in significant quarterly fluctuations. Such quarterly fluctuations are expected, but they may not be predictive of future revenue or otherwise indicate a trend. Additionally, there was a $6.6 million increase in revenue for the three months ended March 31, 2020, as compared to the same period of 2019 due to revenues generated by C Technologies, which was acquired in May 2019.
Royalty revenues in the three months ended March 31, 2020 and 2019 relate to royalties received from a third-party systems manufacturer associated with our OPUS PD chromatography columns. Royalty revenues are variable and are dependent on sales generated by our partner.
Costs of product revenue and operating expenses
Total costs and operating expenses for the three months ended March 31, 2020 and 2019 were comprised of the following:
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| | (Amounts in thousands, except for percentage data) | |
| | $ | | | | $ | | | | $ | | | | | | % |
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Selling, general and administrative | | | | | | | | | | | | | | | | % |
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Total costs and operating expenses | | $ | | | | $ | | | | $ | | | | | | % |
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Cost of product revenue increased 19.1% in the three months ended March 31, 2020, compared to the same period of 2019 due primarily to the increase in product revenue mentioned above.
Gross margins were 58.0% and 55.7% in the three months ended March 31, 2020 and 2019, respectively. The increase in gross margins is a result of the increase in revenue mentioned above, and favorable product mix, partially offset by an increase in manufacturing headcount subsequent to March 31, 2019. Gross margins may fluctuate in future quarters based on expected production volume and product mix.
Research and development expenses
Research and development (“R&D”) expenses are related to bioprocessing products, which include personnel, supplies and other research expenses. Due to the size of the Company and the fact that these various programs share personnel and fixed costs, we do not track all of our expenses or allocate any fixed costs by program, and therefore, have not provided historical costs incurred by project. In addition to the legacy product R&D, the current
single-use
XCell ATF technology incurs expenses related to product development, sterilization, validation testing, and other research related expenses.
R&D expenses increased 29.9% during the three months ended March 31, 2020, compared to the same period of 2019. The increase during the period is primarily due to increased costs associated with an increase in R&D headcount, an increase in stock-based compensation expense resulting from the increased headcount and the higher share price period over period, as well as the addition of $0.8 million in R&D expenses related to C Technologies’ operations.
We expect our R&D expenses for the remainder of 2020 to increase in order to support new product development.
Selling, general and administrative expenses
Selling, general and administrative (“SG&A”) expenses include the costs associated with selling our commercial products and costs required to support our marketing efforts, including legal, accounting, patent, shareholder services, amortization of intangible assets and other administrative functions.
During the three months ended March 31, 2020, SG&A costs increased by $8.5 million, or 44.8%, as compared to the same period of 2019. The increase is due to the addition of $4.9 million SG&A costs from C Technologies’ operations, the continued expansion of our customer-facing activities to drive sales of our bioprocessing products, and the continued buildout of our administrative infrastructure, primarily through increased headcount, to support expected future growth. Stock-based compensation expense increased during the three months ended March 31, 2020, as compared to the same period in 2019 resulting from an increase in headcount and higher share prices period over period.
The table below provides detail regarding our other expenses, net:
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| | (Amounts in thousands, except for percentage data) | |
| | $ | | | | $ | | | | $ | | | | | | % |
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| | $ | | ) | | $ | | ) | | $ | | ) | | | | % |
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Investment income includes income earned on invested cash balances. The increase of $0.7 million for the three months ended March 31, 2020, as compared to the same period of 2019 was attributable to higher average invested cash balances partially offset by a decrease in interest rates during the three months ended March 31, 2020. We expect investment income to vary based on changes in the amount of funds invested and fluctuation of interest rates. In March 2020, in response to the recent outbreak of
COVID-19
and to stay ahead of disruptions and economic slowdown, the Federal Reserve reduced the federal funds rate to a range of 0.0% to 0.25%, which will continue to affect our investment income in future periods.
Interest expense primarily includes interest related to our 2016 Notes, which were settled during the third quarter of 2019, and our 0.375% Convertible Senior Notes due 2024 (the “2019 Notes”), which were issued in July 2019. Interest expense increased $1.3 million for the three months ended March 31, 2020, as compared to the same period in 2019. Contractual coupon interest incurred on the 2019 Notes for the three months ended March 31, 2020 was $0.3 million and there was no comparable amount for the same period of 2019. Contractual coupon interest incurred on the 2016 Notes was $0.6 million in the three months ended March 31, 2019. Since the 2016 Notes were settled during July 2019, interest no longer accrued on the 2016 Notes subsequent to their settlement.
The amortization of debt issuance costs on the 2019 Notes was $2.7 million for the three months ended March 31, 2020. There were no comparable amounts during the same period of 2019 as the 2019 Notes were issued in July 2019. The amortization of the debt issuance costs on the 2016 Notes was $1.1 million for the three months ended March 31, 2019 for which there was no comparable amount recorded during the same period of 2020.
The change in other income during the three months ended March 31, 2020, compared to the same period of 2019, is primarily attributable to foreign currency gains related to amounts due from
non-Swedish
krona-based customers and cash balance denominated in U.S. dollars and British pounds held by Repligen Sweden AB.
Income tax provision for the three months ended March 31, 2020 and 2019 was as follows:
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For the three months ended March 31, 2020 and 2019, we recorded an income tax provision of $0.9 million and $2.5 million, respectively. The effective tax rate is based upon the estimated taxable income for the years ended December 31, 2020 and 2019, respectively, as well as the composition of the taxable income in different jurisdictions. The effective tax rate was lower than the U.S. statutory rate of 21% in the three months ended March 31, 2020 due primarily to windfall benefits on stock option exercises and the vesting of restricted stock units. The effective tax rate for the three months ended March 31, 2019 was higher than the U.S. statutory rate of 21% due to state tax effects and the impact of the Global Intangible
Low-Taxed
Income (“GILTI”) tax enacted as part of the of the Tax Cuts and Jobs Act (“TCJA”) enacted in December 2017.
On March 27, 2020, President Trump signed the $2.2 trillion bipartisan Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The CARES Act, the third congressional bill to address
COVID-19
, provides for loans and other benefits to businesses, expanded unemployment insurance, direct payments to those with middle-income and below wages, new appropriations funding for healthcare and other priorities, and tax changes, including deferrals of employer payroll tax liabilities, coupled with an employee retention tax credit and rollbacks of TCJA limitations on net operating losses and the Section 163(j) business interest limitation and a TCJA technical correction on qualified improvement property. The Company evaluated the provisions of the CARES Act and no provision had a material effect on the Company’s financial position or results of operations at March 31, 2020 and the three months then ended.
Non-GAAP
Financial Measures
We provide
non-GAAP
adjusted income from operations; adjusted net income; and adjusted EBITDA as supplemental measures to GAAP measures regarding our operating performance. These financial measures exclude the items detailed below and, therefore, have not been calculated in accordance with GAAP. A detailed explanation and a reconciliation of each
non-GAAP
financial measure to its most comparable GAAP financial measure is provided below.
We include this financial information because we believe these measures provide a more accurate comparison of our financial results between periods and more accurately reflect how management reviews its financial results. We excluded the impact of certain acquisition-related items because we believe that the resulting charges do not accurately reflect the performance of our ongoing operations for the period in which such charges are incurred.
Non-GAAP
adjusted income from operations
Non-GAAP
adjusted income from operations is measured by taking income from operations as reported in accordance with GAAP and excluding acquisition and integration costs and intangible amortization booked through our consolidated statements of comprehensive income. The following is a reconciliation of income from operations in accordance with GAAP to
non-GAAP
adjusted income from operations for the three months ended March 31, 2020 and 2019:
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GAAP income from operations | | $ | | | | $ | | |
Non-GAAP adjustments to income from operations: | | | | | | | | |
Acquisition and integration costs | | | | | | | | |
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Non-GAAP adjusted income from operations | | $ | | | | $ | | |
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Non-GAAP
adjusted net income
Non-GAAP
adjusted net income is measured by taking net income as reported in accordance with GAAP and excluding acquisition and integration costs, intangible amortization,
non-cash
interest expense and the tax effects of these items. The following are reconciliations of net income in accordance with GAAP to
non-GAAP
adjusted net income for the three months ended March 31, 2020 and 2019:
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| | Three Months Ended March 31, | |
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| | (Amounts in thousands, except per share data) | |
| | $ | | | | $ | | | | $ | | | | $ | | |
Non-GAAP adjustments to net income: | | | | | | | | | | | | | | | | |
Acquisition and integration costs | | | | | | | | | | | | | | | | |
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Tax effect of intangible amortization and acquisition costs | | | | ) | | | | ) | | | | ) | | | | ) |
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Non-GAAP adjusted net income | | $ | | | | $ | | | | $ | | | | $ | | |
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| * | Per share totals may not add due to rounding. |
Adjusted EBITDA is measured by taking net income as reported in accordance with GAAP, excluding investment income, interest expense, taxes, depreciation and amortization and acquisition and integration costs booked through our consolidated statements of comprehensive income. The following is a reconciliation of net income in accordance with GAAP to adjusted EBITDA for the three months ended March 31, 2020 and 2019:
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Non-GAAP EBITDA adjustments to net income: | | | | | | | | |
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Other non-GAAP adjustments: | | | | | | | | |
Acquisition and integration costs | | | | | | | | |
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Liquidity and Capital Resources
We have financed our operations primarily through revenues derived from product sales, the issuance of the 2016 Notes in May 2016 and our 2019 Notes (defined below) in July 2019 and the issuance of common stock in our July 2019, May 2019 and July 2017 public offerings. Our revenue for the foreseeable future will primarily be limited to our bioprocessing product revenue.
At March 31, 2020, we had
non-restricted
cash and cash equivalents of $529.5 million compared to
non-restricted
cash, cash equivalents of $528.4 million at December 31, 2019.
We acquired C Technologies on May 31, 2019 for $239.9 million in cash and shares of our common stock. The C Technologies Acquisition was funded through payment of approximately $195.0 million in cash and 779,221 unregistered shares of the Company’s common stock totaling $53.9 million.
On May 3, 2019, the Company completed a public offering in which 3,144,531 shares of its common stock, which includes the underwriters’ exercise in full of an option to purchase up to an additional 410,156 shares, were sold to the public at a price of $64.00 per share. The total proceeds received by the Company from this offering, net of underwriting discounts and commissions and other estimated offering expenses payable by the Company, totaled approximately $189.6 million. Proceeds from this public offering were partially used to fund the C Technologies Acquisition on May 31, 2019.
On July 19, 2019, the Company completed a public offering in which 1,587,000 shares of its common stock, which includes the underwriters’ exercise in full of an option to purchase an additional 207,000 shares, were sold to the public at a price of $87.00 per share for $131.1 million in net proceeds to the Company, after deducting underwriting discounts and commissions and other estimated offering expenses payable by the Company (the “Stock Offering”).
On July 19, 2019, the Company issued $287.5 million aggregate principal amount of 0.375% Convertible Senior Notes due 2024 (“2019 Notes”), which included the underwriters’ exercise in full of an option to purchase an additional $37.5 million aggregate principal amount of 2019 Notes (the “Notes Offering” and, together with the Stock Offering, the “Offerings”). The net proceeds of the Notes Offering, after deducting underwriting discounts and commissions and other offering expenses payable by the Company, were $278.5 million. See Note 8,
“Convertible Senior Notes,”
included in this report
for more information on this transaction. The Company utilized a portion of the proceeds from the Offerings to settle its outstanding 2016 Notes during the third quarter of 2019. On July 16, 2019, the Company entered into separate privately negotiated agreements with certain holders of the 2016 Notes to exchange an aggregate of $92.0 million principal aggregate amount of the 2016 Notes for shares of the Company’s common stock, together with cash, in private placement transactions (the “Note Exchanges”). On July 19, 2019 and July 22, 2019, the Company used approximately $92.3 million (including $0.3 million of accrued interest) and 1,850,155 shares of its common stock valued at $161.0 million to settle the Note Exchanges for total consideration of $253.3 million, of which $163.6 million was allocated to the equity component of the 2016 Notes. The Company allocated the consideration transferred to the liability and equity components using the same proportions as the initial carrying value of the 2016 Notes.
During the first quarter of 2020, the closing price of the Company’s common stock did not exceed 130% of the conversion price of the 2019 Notes for more than 20 trading days of the last 30 consecutive trading days of the quarter. Therefore, the 2019 Notes are not convertible at the option of the holders of the 2019 Notes during the second quarter of 2020 per the First Supplemental Indenture underlying the 2019 Notes. The 2019 Notes have a face value of $287.5 million and a carrying value of $235.5 million and are classified as long-term liabilities on the Company’s consolidated balance sheet as of March 31, 2020.
We intend to use the remaining net proceeds from the Offerings for working capital and other general corporate purposes, including to fund possible acquisitions of, or investments in, complementary businesses, products, services and technologies. It is the Company’s policy and intent to settle the face value of the 2019 Notes in cash and any excess conversion premium in shares of our common stock.
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For the three months ended March 31, 2020, our operating activities provided cash of $9.5 million reflecting net income of $9.8 million and
non-cash
charges totaling $13.4 million primarily related to depreciation, amortization,
non-cash
interest expense and stock-based compensation charges. An increase in accounts receivable consumed $2.4 million of cash and was primarily driven by the 25.5%
year-to-date
increase in revenues. An increase in inventory consumed $7.2 million to support future revenue, as well as inventory acquired in the acquisition of C Technologies Acquisition. A decrease in accounts payable and accrued liabilities of $5.7 million was due to accrued liabilities acquired in the acquisition of C Technologies Acquisition, the timing of payments of payables, payment of the 2019 incentive compensation programs and an adjustment to the tax liability for the quarter. The remaining cash provided by operating activities resulted from favorable changes in various other working capital accounts.
For the three months ended March 31, 2019, our operating activities provided cash of $9.8 million reflecting net income of $8.1 million and
non-cash
charges totaling $9.5 million primarily related to depreciation, amortization,
non-cash
interest expense, deferred tax expense and stock-based compensation charges. An increase in accounts receivable consumed $6.7 million of cash and was primarily driven by the 35% quarter over quarter increase in revenues. Payments of accounts payable and accrued liabilities consumed $2.4 million of cash and were mainly due to the timing of payments of payables and payment of 2018 incentive compensation programs. These were offset by a decrease in unbilled receivables of $2.6 million. The remaining cash used in operating activities resulted from net unfavorable changes in various other working capital accounts.
Our investing activities consumed $5.0 million and $3.8 million of cash during the three months ended March 31, 2020 and 2019, respectively, related to capital expenditures. Of these capital expenditures, $0.9 million and $1.7 million represented capitalized costs related to our
internal-use
software, respectively.
Cash provided by financing activities of $1.6 million for the three months ended March 31, 2020 included proceeds from stock option exercises during the period.
Working capital increased by approximately $16.0 million to $609.5 million at March 31, 2020 from $593.5 million at December 31, 2019 due to the various changes noted above.
Our future capital requirements will depend on many factors, including the following:
| | • | the expansion of our bioprocessing business; |
| | • | the ability to sustain sales and profits of our bioprocessing products; |
| | • | our ability to acquire additional bioprocessing products; |
| | • | our identification and execution of strategic acquisitions or business combinations; |
| | • | the scope of and progress made in our R&D activities; |
| | • | the extent of any share repurchase activity; and |
| | • | the success of any proposed financing efforts. |
Absent acquisitions of additional products, product candidates or intellectual property, we believe our current cash balances are adequate to meet our cash needs for at least the next 24 months from the date of this filing. We expect operating expenses for the rest of the year to increase as we continue to expand our bioprocessing business. We expect to incur continued spending related to the development and expansion of our bioprocessing product lines and expansion of our commercial capabilities for the foreseeable future. Our future capital requirements may include, but are not limited to, purchases of property, plant and equipment, the acquisition of additional bioprocessing products and technologies to complement our existing manufacturing capabilities, and continued investment in our intellectual property portfolio.
We plan to continue to invest in our bioprocessing business and in key R&D activities associated with the development of new bioprocessing products. We actively evaluate various strategic transactions on an ongoing basis, including licensing or acquiring complementary products, technologies or businesses that would complement our existing portfolio. We continue to seek to acquire such potential assets that may offer us the best opportunity to create value for our shareholders. In order to acquire such assets, we may need to seek additional financing to fund these investments. If our available cash balances and anticipated cash flow from operations are insufficient to satisfy our liquidity requirements, including because of any such acquisition-related financing needs or lower demand for our products, we may seek to sell common or preferred equity or convertible debt securities, enter into a credit facility or another form of third-party funding, or seek other debt funding. The sale of equity and convertible debt securities may result in dilution to our stockholders, and those securities may have rights senior to those of our common shares. If we raise additional funds through the issuance of preferred stock, convertible debt securities or other debt financing, these securities or other debt could contain covenants that would restrict our operations. Any other third-party funding arrangement could require us to relinquish valuable rights. We may require additional capital beyond our currently anticipated amounts. Additional capital may not be available on reasonable terms, if at all.
Off-Balance
Sheet Arrangements
We do not have any special purpose entities or
off-balance
sheet financing arrangements as of March 31, 2020.
Net Operating Loss Carryforwards
At December 31, 2019, we had net operating loss carryforwards of $0.2 million remaining. We had business tax credits carryforwards of $2.1 million available to reduce future federal income taxes, if any. The business tax credits carryforwards will continue to expire at various dates through December 2039. Net operating loss carryforwards and available tax credits are subject to review and possible adjustment by the Internal Revenue Service, state and foreign jurisdictions and may be limited in the event of certain changes in the ownership interest of significant stockholders.
Our assets are primarily monetary, consisting of cash, cash equivalents and marketable securities. Because of their liquidity, these assets are not directly affected by inflation. Since we intend to retain and continue to use our equipment, furniture and fixtures and leasehold improvements, we believe that the incremental inflation related to replacement costs of such items will not materially affect our operations. However, the rate of inflation affects our expenses, such as those for employee compensation and contract services, which could increase our level of expenses and the rate at which we use our resources.
Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report on Form
10-Q
contains forward-looking statements which are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The forward-looking statements in this Quarterly Report on Form
10-Q
do not constitute guarantees of future performance. Investors are cautioned that statements in this Quarterly Report on Form
10-Q
which are not strictly historical statements, including, without limitation, express or implied statements or guidance regarding current or future financial performance and position, potential impairment of future earnings, management’s strategy, plans and objectives for future operations or acquisitions, product
development and sales, product candidate research, development and regulatory approval, SG&A expenditures, intellectual property, development and manufacturing plans, availability of materials and product and adequacy of capital resources, the projected impact of, and response to, the coronavirus pandemic, and financing plans constitute forward-looking statements. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which the Company operates, and management’s beliefs and assumptions. The Company undertakes no obligation to publicly update or revise the statements in light of future developments. In addition, other written and oral statements that constitute forward-looking statements may be made by the Company or on the Company’s behalf. Words such as “expect,” “seek,” “anticipate,” “intend,” “plan,” “believe,” “could,” “estimate,” “may,” “target,” “project,” or variations of such words and similar expressions are intended to identify forward-looking statements. Such forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated, including, without limitation, risks associated with the following: the ultimate impact of the coronavirus pandemic on our business or financial results; the success of current and future collaborative or supply relationships, including our agreements with GE Healthcare and MilliporeSigma; our ability to successfully grow our bioprocessing business, including as a result of acquisitions, commercialization or partnership opportunities, and our ability to develop and commercialize products; our ability to obtain required regulatory approvals; our compliance with all U.S. Food and Drug Administration regulations, our ability to obtain, maintain and protect intellectual property rights for our products; the risk of litigation regarding our patent and other intellectual property rights; the risk of litigation with collaborative partners; our limited manufacturing capabilities and our dependence on third-party manufacturers and value-added resellers; the effect of the pandemic of the novel coronavirus disease, including mitigation efforts and economic effects, on our business operations; our ability to hire and retain skilled personnel; the market acceptance of our products, reduced demand for our products that adversely impacts our future revenues, cash flows, results of operations and financial condition; our ability to compete with larger, better financed life sciences companies; our history of losses and expectation of incurring losses; our ability to generate future revenues; our ability to successfully integrate our recently acquired businesses; our ability to raise additional capital to fund potential acquisitions; our volatile stock price; and the effects of our anti-takeover provisions. Further information on potential risk factors that could affect our financial results are included in the filings made by us from time to time with the Securities and Exchange Commission including under the sections entitled “Risk Factors” in this Quarterly Report on Form
10-Q
and in our Annual Report on Form
10-K
for the year ended December 31, 2019.
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We have historically held investments in commercial paper, U.S. Government and agency securities as well as corporate bonds and other debt securities. As a result, we have been exposed to potential loss from market risks that may occur as a result of changes in interest rates, changes in credit quality of the issuer or otherwise. We do not have any such investments as of March 31, 2020. As a result, a hypothetical 100 basis point increase in interest rates would have no effect on our cash position as of March 31, 2020.
We generally place our marketable security investments in high quality credit instruments, as specified in our investment policy guidelines. We believe that the conservative nature of our investments mitigates our interest rate exposure, and our investment policy limits the amount of our credit exposure to any one issue, issuer (with the exception of U.S. agency obligations) and type of instrument. We do not expect any material losses from our marketable security investments and therefore believe that our potential interest rate exposure is limited.
The reporting currency of the Company is U.S. dollars, and the functional currency of each of our foreign subsidiaries is its respective local currency. Our foreign currency exposures include the Swedish krona, Euro, British pound, Chinese yuan, Japanese yen, Singapore dollar, South Korean won and Indian rupee; of these, the primary foreign currency exposures are the Swedish krona, Euro and British pound. Exchange gains or losses resulting from the translation between the transactional currency and the functional currency are included in net income. Fluctuations in exchange rates may adversely affect our results of operations, financial position and cash flows. We currently do not seek to hedge this exposure to fluctuations in exchange rates.
Disclosure Controls and Procedures
The Company’s management, with the participation of the principal executive officer and the principal financial officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules
13a-15(e)
or
15d-15(e)
under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, the principal executive officer and principal financial officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.
PART II. OTHER INFORMATION
From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. We are not currently aware of any such proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or results of operations.
The matters discussed in this Quarterly Report on Form
10-Q
include forward-looking statements that involve risks or uncertainties. These statements are neither promises nor guarantees, but are based on various assumptions by management regarding future circumstances, over many of which Repligen has little or no control. A number of important risks and uncertainties, including those identified under the caption
in Part I, Item 1A of our Annual Report on Form
10-K
for the period ended December 31, 2019 and in subsequent filings, could cause our actual results to differ materially from those in the forward-looking statements. Other than the additional risk factors set forth below, there are no material changes to the risk factors described in our Annual Report on Form
10-K
for the period ended December 31, 2019.
The
COVID-19
pandemic, or similar public health crises, could have a material adverse impact on our business, financial condition and results of operations, including our product sales, and our stock price.
Since December 2019, an outbreak of a novel strain of coronavirus,
SARS-CoV-2,
which causes coronavirus disease 2019 (“
COVID-19”
), has since spread to countries in which we or our customers and suppliers operate, including the United States. The global spread of
COVID-19
has led local and national governmental authorities to implement various responses to combat the virus, including government-imposed quarantines, extended business closures, travel restrictions and other public health safety measures. The
COVID-19
outbreak continues to rapidly evolve. The extent to which the outbreak impacts our business, including our financial results, will depend on future developments, which are highly uncertain and cannot be predicted at this time with confidence, such as the continued geographic spread of the disease, the duration of the outbreak, and actions taken in the United States and elsewhere to contain the outbreak and treat the disease, such as social distancing and quarantines, business closures or business disruptions.
In response to the
COVID-19
pandemic, in accordance with direction from state and local government authorities, we have restricted access to our facilities mostly to personnel and third parties who must perform critical activities that must be completed
on-site,
limited the number of such personnel that can be present at our facilities at any one time, and requested that most of our personnel work remotely. In the event that governmental authorities were to further modify current restrictions, our employees conducting research and development or manufacturing activities may not be able to access our manufacturing space. Certain of our third-party suppliers have also temporarily closed facilities and have experienced work stoppages due to the spread of
COVID-19.
Our revenues and other operating results depend in large part on our ability to manufacture and assemble our products in sufficient quantities and in a timeline manner. Business closures and work stoppages at our facilities and our third-supply suppliers’ facilities as a result of
COVID-19
may lead to interruptions in our manufacturing activities and our product supply and could have a material adverse effect on our business and our results of operation and financial condition.
We operate on a global basis with offices or activities in Japan, South Korea, China, India, Europe and North America, and global health crises, such as
COVID-19,
could result in a widespread economic downturn in the industries in which we and our customers operate. Such an economic downturn could result in delays or otherwise adversely affect the completion of our customers’ preclinical activities and clinical trials, as well as the healthcare industry generally. In addition, the diversion of financial resources in the healthcare system away from routine patient treatment, drug development and clinical trials in order to focus on pandemic concerns could result in reduced demand for our products or our customer’s products and could significantly impact our operating results.
In addition, the trading prices for our common stock and other bioprocessing and life sciences companies have been highly volatile as a result of the
COVID-19
pandemic. As a result, we may face difficulties raising capital through sales of our common stock or such sales may be on unfavorable terms.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
