REPLIGEN CORPORATION Overview
Repligen and its subsidiaries, collectively doing business asRepligen 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 Products 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 primarily 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 seven key manufacturing sites acrossthe United States ,Sweden andGermany , with additional capacity being added by the end of 2021 inthe 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. Chromatography 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 ® pre-packed 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. OPUS Pre-Packed Columns 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. 28 -------------------------------------------------------------------------------- Table of Contents 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 vaccines and 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 boththe United States andEurope 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. Other Chromatography 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. Filtration 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. Our XCell Alternating Tangential Flow ("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 XCellATF 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. InSeptember 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 InDecember 2016 , we acquiredTangenX ™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. TheTangenX product portfolio includes our single-use SIUS ™ brand, providing customers with a high-performance, cost saving alternative to reusable TFF cassettes. 29 -------------------------------------------------------------------------------- Table of Contents 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. Spectrum ® Hollow Fibers We acquiredSpectrum Life Sciences LLC ("Spectrum") and its subsidiaries inAugust 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 and systems are 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 inEurope andAsia , and we diversified our end markets to include all biologic classes, including mAb, vaccines, recombinant proteins and gene therapies. Other Filtration 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 ourTangenX flat sheet TFF systems. We also self-manufacture HF filters that are used in our XCell ATF, KrosFlo TFF and KrosFlo TFDF systems. OnJuly 13, 2020 , we consummated the acquisition ofEngineered Molding Technology LLC ("EMT"), aNew York liability company, and added EMT's silicone-based, single-use components and manifolds to our filtration franchise. These products are key components in single-use filtration and chromatography systems and will help expand the Company's line of single-use ProConnex flow paths, streamline our supply chain forATF and provide more flexibility we scale and expand our single-use and systems portfolios. Process Analytics InMay 2019 , we consummated our acquisition ofC 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. SoloVPE ® Device 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. FlowVPE ® Device 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. 30 -------------------------------------------------------------------------------- Table of Contents 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. OEM Products (Proteins) Our Proteins 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. Proteins - Ligands 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 includingGE 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 inLund, Sweden and another inWaltham, 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. InJune 2018 , we entered into an agreement withNavigo Proteins GmbH ("Navigo") for the exclusive co-development of multiple affinity ligands for whichRepligen 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. Proteins - Growth Factors 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 primarily sold through a distribution partnership withMilliporeSigma . 2020 Acquisitions Proposed Acquisition of ARTeSYN Biosolutions OnOctober 27, 2020 , the Company entered into an Equity and Asset Purchase Agreement ("Purchase Agreement") withARTeSYN Biosolutions Holdings Ireland Limited , a company organized under the laws ofIreland ("ARTeSYN"),Third Creek Holdings, LLC , aNevada limited liability company,Alphinity, LLC , aNevada limited liability company ("Alphinity", and together withThird Creek Holdings, LLC the "Sellers"), andMichael Gagne , solely in his capacity as the representative of the Sellers, pursuant to which the Company will acquire (i) all of the outstanding equity securities of ARTeSYN and (ii) certain assets from Alphinity related to the business of ARTeSYN (collectively, the "ARTeSYN Acquisition") for approximately$200 million , comprised of approximately$130 million in cash to Third Creek and Alphinity and approximately$70 million inRepligen common stock to Third Creek. Subject to certain closing conditions, including the expiration and termination of the waiting period under the Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended, the transaction is expected to close in the fourth quarter of 2020. ARTeSYN, headquartered inWaterford, Ireland , is a biosystems innovator that has had success with its single-use chromatography and filtration systems, which are considered the gold standard in downstream bioprocessing due to their performance, automation and low hold-up volumes. The proposed ARTeSYN Acquisition, combined with the recent acquisitions ofEMT and Non-Metallic Solutions, Inc. , further establishesRepligen as a premier player in single-use systems and associated integrated flow path assemblies. ARTeSYN has established downstream processing leadership with a suite of state of the art single-use systems for chromatography, filtration, continuous manufacturing and media/buffer prep workflows. In addition, the Company has integrated unique flow path assemblies utilizing EMT's silicone extrusion and molding technology, to deliver highly differentiated, low hold-up volume systems that minimize product loss during processing. Non-MetallicSolutions, Inc. OnOctober 15, 2020 , the Company entered into a Stock Purchase Agreement with Non-MetallicSolutions, Inc. ("NMS"), aMassachusetts corporation, and William Malloneé andDerek Masser , the legal and beneficial owners of NMS, to purchase NMS, which transaction subsequently closed onOctober 20, 2020 (the "NMS Acquisition"). NMS, which is headquartered inAuburn, Massachusetts , is a manufacturer of fabricated plastics, custom containers, and related assemblies and components used in the manufacturing of biologic drugs. NMS's products will complement and expandRepligen's single-use product offerings. 31
-------------------------------------------------------------------------------- Table of Contents Engineered Molding Technology OnJune 26, 2020 , we entered into a Membership Interest Purchase Agreement with EMT andMichael Pandori andTodd Etesse , the legal and beneficial owners of EMT to purchase EMT, which transaction subsequently closed onJuly 13, 2020 (the "EMT Acquisition"). EMT, which is headquartered inClifton Park, New York , is an innovator and manufacturer of single-use silicone assemblies and components used in the manufacturing of biologic drugs. EMT's standard and customer molding and over-molded connectors and silicone tubing products are key components in single-use filtration and chromatography systems. Its products complement and expand our single-use product offerings. The EMT Acquisition was accounted for as a purchase of a business under Accounting Standards Codification No. ("ASC") 805, "Business Combinations." The cash paid for the EMT Acquisition was$28.5 million , which will be consideration transferred under ASC 805. This includes$2.2 million deposited into escrow for indemnification obligations of the sellers. 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 endedDecember 31, 2019 filed with theSEC . Results of Operations 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. Revenues Total revenue for the three and nine months endedSeptember 30, 2020 and 2019 were as follows: Three Months Ended Nine Months Ended September 30, Increase/(Decrease) September 30, Increase/(Decrease) 2020 2019 $ Change % Change 2020 2019 $ Change % Change (Amounts in thousands, except for percentage data) Revenue: Products$ 94,029 $ 69,419 $ 24,610 35.5 %$ 257,521 $ 200,701 $ 56,820 28.3 % Royalty and other 31 26 5 19.2 % 91 70 21 30.0 % Total revenue$ 94,060 $ 69,445 $ 24,615 35.4 %$ 257,612 $ 200,771 $ 56,841 28.3 % Product revenues 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 represented approximately 82% and 80% of our product revenue for the three months endedSeptember 30, 2020 and 2019, respectively, and represented approximately 77% and 75% of our product revenue for the nine months endedSeptember 30, 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, SIUS filtration products and the silicone-molded products offered by EMT, which we acquired onJuly 13, 2020 . 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 and nine months endedSeptember 30, 2020 , product revenue increased by$24.6 million , or 35.5%, and$56.8 million , or 28.3%, as compared to the same periods of 2019. The increase is due to the continued adoption of our products by 32 -------------------------------------------------------------------------------- Table of Contents our key bioprocessing customers, particularly our chromatography and filtration products. Beginning in the second quarter of 2020, we have experienced an increase in overall sales as a result of accelerated demand for our protein and filtration products. The demand was broad-based covering mAb, gene therapy and COVID-19 customers working on vaccines and therapeutics. We expect there will be a continued increase in direct sales through the remainder of 2020, especially from COVID-19 customers as they scale-up and move candidates through the clinical trial process. In addition, demand for our protein and ligands products increased during the three and nine months endedSeptember 30, 2020 , as compared to the same periods of 2019. 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. There was also a$14.6 million increase in revenue for the nine months endedSeptember 30, 2020 , as compared to the same periods of 2019 due to revenues generated by C Technologies. Since the acquisition date was inMay 2019 , only four months of revenue were included in the nine months endedSeptember 30, 2019 . Royalty revenues Royalty revenues in the three and nine months endedSeptember 30, 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 and nine months endedSeptember 30, 2020 and 2019 were comprised of the following: Three Months Ended Nine Months Ended September 30, Increase/(Decrease) September 30, Increase/(Decrease) 2020 2019 $ Change % Change 2020 2019 $ Change % Change (Amounts in thousands, except for percentage data) Cost of product revenue$ 39,626 $ 31,425 $ 8,201 26.1 %$ 108,471 $ 88,978 $ 19,493 21.9 % Research and development 4,422 5,427 (1,005 ) (18.5 %) 13,460 14,278 (818 ) (5.7 %) Selling, general and administrative 29,051 24,629 4,422 18.0 % 83,277 67,326 15,951 23.7 % Total costs and operating expenses$ 73,099 $ 61,481 $ 11,618 18.9 %$ 205,208 $ 170,582 $ 34,626 20.3 % Cost of product revenue Cost of product revenue increased 26.1% and 21.9% in the three and nine months endedSeptember 30, 2020 , compared to the same periods of 2019, due primarily to the increase in product revenue mentioned above and costs associated with higher product volume. An increase in manufacturing headcount resulted in higher employee-related costs for the three and nine months endedSeptember 30, 2020 , compared to the same periods of 2019. Additional facility costs, including personal protection equipment purchased for essential manufacturing personnel on site to protect against COVID-19, were also incurred during the three and nine months endedSeptember 30, 2020 for which there were no comparable amounts in 2019. Gross margins were 57.9% in both the three and nine months endedSeptember 30, 2020 . The gross margin for the three months endedSeptember 30, 2020 includes$0.1 million of amortization of inventory step-up associated with the EMT Acquisition. The gross margins for the three and nine months endedSeptember 30, 2019 , which include$0.3 million and$1.5 million of amortization on inventory step-up associated with the C Technologies Acquisition inMay 2019 , were 54.7% and 55.7%, respectively. Excluding the step-up amortization, gross margins for the three and nine months endedSeptember 30, 2019 were 55.2% and 56.4%. The increase in gross margins, excluding the inventory step-up amortization, in the three and nine months endedSeptember 30, 2020 , as compared to the same period of 2019, is due primarily to the increase in revenue mentioned above, and favorable product volumes and mix, partially offset by an increase in manufacturing headcount subsequent toSeptember 30, 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. 33 -------------------------------------------------------------------------------- Table of Contents R&D expenses decreased 18.5% and 5.7% during the three and nine months endedSeptember 30, 2020 , compared to the same period of 2019. The decrease during the periods is primarily due to a decrease in R&D spending on projects, as most R&D personnel worked remotely for most of 2020 due to COVID-19. This is partially offset by a$1.2 million increase in R&D expenses year over year, related to C Technologies operations. The nine months endedSeptember 30, 2020 only had four months of expenses since the acquisition was consummated onMay 31, 2019 . We expect our R&D expenses for the remainder of 2020 to gradually increase 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 and nine months endedSeptember 30, 2020 , SG&A costs increased by$4.4 million , or 18.0%, and$16.0 million , or 23.7%, as compared to the same periods of 2019. The increase is partially due to 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 and other employee-related costs increased during the three and nine months endedSeptember 30, 2020 , as compared to the same period in 2019, resulting from an increase in headcount and higher share prices period over period. In addition,$5.9 million of the increase in SG&A costs for the nine months endedSeptember 30, 2020 , was related to the C Technologies operations, which was acquired inMay 2019 . C Technologies' SG&A costs for the nine months endedSeptember 30, 2020 include nine months of costs, compared to only four months in the same period of 2019. Other expenses, net The table below provides detail regarding our other expenses, net: Three Months Ended Nine Months Ended September 30, Increase/(Decrease) September 30, Increase/(Decrease) 2020 2019 $ Change % Change 2020 2019 $ Change % Change (Amounts in thousands, except for percentage data) Investment income$ 82 $ 1,898 $ (1,816
) (95.7 %)
- (5,650 ) 5,650 (100.0 %) - (5,650 ) 5,650 (100.0 %)
Interest expense (3,052 ) (2,857 ) (195 ) 6.8 % (9,032 ) (6,326 ) (2,706 ) 42.8 %
Other expenses (248 ) 316 (564 ) (178.5 %) (632 ) (23 ) (609 ) 2647.8 %
Total other expense, net $ (3,218 ) $ (6,293 ) $ 3,075 (48.9 %) $ (7,965 ) $ (8,383 ) $ 418 (5.0 %)
Investment income
Investment income includes income earned on invested cash balances. The decrease
of $1.8 million and $1.9 million for the three and nine months ended
September 30, 2020 , as compared to the same periods of 2019, was attributable to
a decrease in interest rates on our average invested cash balances. In March
2020 , in response to the outbreak of
COVID-19
and to stay ahead of disruptions and economic slowdown, the Federal Reserve
reduced federal funds rate to a range of 0.0% to 0.25%, which will continue to
affect our investment income in future periods. Higher average invested cash
balances during the three and nine months ended September 30, 2020 , as compared
to the same periods of 2019 due to the completion of a public offering and the
issuance of our 2019 Notes during the third quarter of 2019, partially offset
the decrease in interest rates mentioned above. We expect investment income to
vary based on changes in the amount of funds invested and fluctuation of
interest rates.
Loss on extinguishment of debt
The $5.6 million loss on extinguishment of debt in the three and nine months
ended September 30, 2019 , resulted from the settlement of our outstanding 2.125%
Convertible Senior Notes due 2021 (the "2016 Notes"). The loss represents the
difference between (i) the fair value of the liability component and (ii) the
sum of the carrying value of the debt component and any unamortized debt
issuance costs at the time of settlement.
34
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Table of Contents
Interest expense
Interest expense in the three and nine months ended September 30, 2020 is from
our 0.375% Convertible Senior Notes due 2024 (the "2019 Notes"), which were
issued in July 2019 . Interest expense in the three and nine months ended
September 30, 2019 is from our 2016 Notes, which were settled during the third
quarter of 2019. Interest expense increased $0.2 million and $2.7 million for
the three and nine months ended September 30, 2020 , as compared to the same
periods in 2019.
The amortization of debt issuance costs on the 2019 Notes was $2.8 million and
$8.2 million for the three and nine months ended September 30, 2020 .
Amortization of debt issuance costs on the 2019 Notes was $2.1 million for both
the three and nine months ended September 30, 2019 . The amortization of the debt
issuance costs on the 2016 Notes was $0.6 million and $2.8 million for the three
and nine months ended September 30, 2019 , respectively.
Contractual coupon interest incurred on the 2019 Notes for the three and nine
months ended September 30, 2020 was $0.3 million and $0.8 million , respectively.
Interest calculated based on the carrying value related to the 2019 Notes for
both the three and nine months ended September 30, 2019 was $0.2 million .
Contractual coupon interest incurred on the 2016 Notes was $0.1 million and
$1.3 million in the three and nine months ended September 30, 2019 . Since the
2016 Notes were settled during July 2019 , interest no longer accrued on the 2016
Notes subsequent to their settlement.
Other expenses
The change in other expenses during the three and nine months ended
September 30, 2020 , compared to the same period of 2019, is primarily
attributable to foreign currency losses related to amounts due from
non-Swedish
krona-based customers and vendors.
Income tax provision
Income tax provision for the three and nine months ended September 30, 2020 and
2019 was as follows:
Three Months Nine Months
Ended Ended
September 30, Increase/(Decrease) September 30, Increase/(Decrease)
2020 2019 $ Change % Change 2020 2019 $ Change % Change
(Amounts in thousands, except for percentage data)
Income tax provision $ 3,191 $ 12 $ 3,179 26491.7 % $ 4,211 $ 3,999 $ 212 5.3 %
Effective tax rate 18.0 % 0.7 % 9.5 % 18.3 %
For the three and nine months ended September 30, 2020 , we recorded an income
tax expense of $3.2 million and $4.2 million , respectively. The effective tax
rate was 18.0% and 9.5% for the three and nine months ended September 30, 2020
and is based upon the estimated income for the year ending December 31, 2020 and
the composition of income in different jurisdictions and impacts of various
discrete tax adjustments. The effective tax rate for the three and nine months
ended September 30, 2020 was lower than the U.S. statutory rate of 21% primarily
due to windfall benefits on stock option exercises and the vesting of stock
units. We recorded a tax provision of less than $0.1 million and $4.0 million ,
respectively for the three and nine months ended September 30, 2019 . The
effective tax rate was 0.7% and 18.3% for the three and nine months ended
September 30, 2019 and the composition of income in different jurisdictions and
the impacts of various discrete tax adjustments. The effective tax rate for the
three and nine months ended September 30, 2019 was lower than the U.S. statutory
rate of 21% primarily due to windfall benefits on stock option exercise and the
vesting of stock units.
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.
35
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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, intangible amortization and inventory
step-up
charges booked through our consolidated statements of comprehensive income
(loss). The following is a reconciliation of income from operations in
accordance with GAAP to
non-GAAP
adjusted income from operations for the three and nine months ended
September 30, 2020 and 2019:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
(Amounts in thousands)
GAAP income from operations $ 20,961 $ 7,964 $ 52,404 $ 30,189
Non-GAAP
adjustments to income from operations:
Acquisition and integration costs 1,849 2,953 6,536 9,573
Intangible amortization 3,925 3,900 11,677 9,562
Inventory
step-up
charges 144 314 144 1,483
Non-GAAP
adjusted income from operations
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, inventory step-up charges, loss on extinguishment of debt, 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 and nine months endedSeptember 30, 2020 and 2019: Three Months Ended September 30, 2020 2019 Fully Fully Diluted Diluted Earnings Earnings per per Amount Share Amount Share (Amounts in thousands, except per share data) GAAP net income$ 14,552 $ 0.27 $ 1,659 $ 0.03 Non-GAAP adjustments to net income: Acquisition and integration costs 1,849 0.03 2,953 0.06 Intangible amortization 3,925 0.07 3,900 0.08 Loss on extinguishment of debt - - 5,650 0.11 Inventory step-up charges 144 0.00 314 0.01 Non-cash interest expense 2,759 0.05 2,631 0.05 Tax effect of intangible amortization and acquisition costs (2,072 ) (0.04 ) (3,781 ) (0.07 ) Non-GAAP adjusted net income$ 21,157 $ 0.40 $ 13,326 $ 0.26 36
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Nine Months Ended September 30,
2020 2019
Fully Fully
Diluted Diluted
Earnings Earnings
per per
Amount Share Amount Share
(Amounts in thousands, except per share
data)
GAAP net income $ 40,228 $ 0.75 $ 17,807 $ 0.37
Non-GAAP
adjustments to net income:
Acquisition and integration costs 6,536 0.12 10,074 0.21
Intangible amortization 11,677 0.22 9,562 0.20
Inventory
step-up
charges 144 0.00 1,483 0.03
Loss on extinguishment of debt - - 5,650 0.12
Non-cash
interest expense 8,174 0.15 4,863 0.10 Tax effect of intangible amortization and acquisition costs (6,334 ) (0.12 ) (7,742 ) (0.16 ) Non-GAAP adjusted net income$ 60,425 $ 1.13 $ 41,697 $ 0.87 * Per share totals may not add due to rounding. Adjusted EBITDA Adjusted EBITDA is measured by taking net income as reported in accordance with GAAP, excluding investment income, interest expense, taxes, depreciation and amortization, acquisition and integration costs, inventory step-up charges and loss on extinguishment of debt booked through our consolidated statements of comprehensive income (loss). The following is a reconciliation of net income in accordance with GAAP to adjusted EBITDA for the three and nine months endedSeptember 30, 2020 and 2019: Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 (Amounts in thousands) GAAP net income$ 14,552 $ 1,659 $ 40,228 $ 17,807 Non-GAAP EBITDA adjustments to net income: Investment income (82 ) (1,898 ) (1,699 ) (3,616 ) Interest expense 3,052 2,857 9,032 6,326 Tax provision 3,191 12 4,211 3,999 Depreciation 2,757 1,810 7,820 5,147 Amortization 3,953 3,928 11,760 9,644 EBITDA 27,423 8,368 71,352 39,307 Other non-GAAP adjustments:
Acquisition and integration costs 1,849 2,953 6,536
10,074
Loss on extinguishment of debt - 5,650 - 5,650 Inventory step-up charges 144 314 144 1,483 Adjusted EBITDA$ 29,416 $ 17,285 $ 78,032 $ 56,514 Liquidity and Capital Resources We have financed our operations primarily through revenues derived from product sales, the issuance of the 2016 Notes inMay 2016 and our 2019 Notes (defined below) inJuly 2019 and the issuance of common stock in ourJuly 2019 ,May 2019 andJuly 2017 public offerings. Our revenue for the foreseeable future will primarily be limited to our bioprocessing product revenue. AtSeptember 30, 2020 , we had cash and cash equivalents (excluding restricted cash) of$553.3 million compared to cash and cash equivalents (excluding restricted cash) of$528.4 million atDecember 31, 2019 . OnJuly 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 inJuly 2019 as mentioned in Note 9, "Stockholders' Equity" included in this report, 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, 37 -------------------------------------------------------------------------------- Table of Contents "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. OnJuly 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"). OnJuly 19, 2019 andJuly 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 third 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 fourth 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$240.9 million and are classified as long-term liabilities on the Company's consolidated balance sheet as ofSeptember 30, 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, such as the acquisitions mentioned in Note 16, "Subsequent Events," included in this report. 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. Cash flows Nine Months Ended September 30, Increase/(Decrease) 2020 2019 $ Change (Amounts in thousands) Operating activities$ 47,754 $ 49,542 $ (1,788 ) Investing activities (43,097 ) (198,197 ) 155,100 Financing activities 7,078 485,047 (477,969 ) Effect of exchange rate changes on cash, cash equivalents and restricted cash 4,160 (7,785 ) 11,945 Net increase in cash, cash equivalents and restricted cash$ 15,895 $ 328,607 $ (312,712 ) Operating activities For the nine months endedSeptember 30, 2020 , our operating activities provided cash of$47.8 million reflecting net income of$40.2 million and non-cash charges totaling$40.5 million primarily related to depreciation, amortization, deferred income taxes, non-cash interest expense and stock-based compensation charges. An increase in accounts receivable consumed$11.5 million of cash and was primarily driven by the 35.4% year-to-date increase in revenues. An increase in inventory manufactured of$22.8 million supports expected increases in future revenue. An increase in accounts payable and accrued liabilities of$1.1 million was primarily due to increased inventory purchases to support customer orders, offset by payment of acquisition-related bonuses for C Technologies during the second quarter of 2020. The remaining cash provided by operating activities resulted from favorable changes in various other working capital accounts. For the nine months endedSeptember 30, 2019 , our operating activities provided cash of$49.5 million reflecting net income of$17.8 million and non-cash charges totaling$25.2 million primarily related to depreciation, amortization, non-cash interest expense, deferred taxes, loss on extinguishment of debt and stock-based compensation charges. An increase in accounts receivable consumed$6.7 million of cash and was primarily driven by the 41.3% year-to-date increase in revenues. An increase in inventory consumed$4.9 million to support future revenue, due to the addition of C Technologies onMay 31, 2019 . These movements were offset by an increase in accounts payable and accrued liabilities of$6.5 million due to the addition of C Technologies as well as a decrease in unbilled receivables of$2.0 million . The remaining cash provided by operating activities resulted from favorable changes in various other working capital accounts. Investing activities Our investing activities consumed$43.1 million of cash during the nine months endedSeptember 30, 2020 related to the EMT Acquisition onJuly 13, 2020 , as well as ongoing capital expenditures. Our investing activities consumed$198.2 million in the nine months endedSeptember 30, 2019 related to the purchase of C Technologies, and capital expenditures. We consumed$28.5 million in cash (net of cash received) for the EMT Acquisition onJuly 13, 2020 and$182.2 million in cash (net of cash received) for the C Technologies Acquisition onMay 31, 2019 . 38 -------------------------------------------------------------------------------- Table of Contents Capital expenditures in 2020 and 2019 included$3.6 million and$4.6 million , respectively, for capitalized costs related to our internal-use software. Financing activities Cash provided by financing activities of$7.1 million for the nine months endedSeptember 30, 2020 included proceeds from stock option exercises and the vesting of stock units during the period. Cash provided by financing activities of$485.0 million for the nine months endedSeptember 30, 2019 included$320.7 million from the issuance of our common stock resulting from our public offerings completed in May andJune 2019 . In addition, inJuly 2019 we issued$287.5 million aggregate principal amount of the 2019 Notes for net proceeds of$278.6 million . Proceeds from stock option exercises during the nine months endedSeptember 30, 2019 were$1.1 million . Offsetting these movements was$115.0 million of cash utilized by us inJuly 2019 to settle the 2016 Notes. Working capital increased by approximately$52.2 million to$645.7 million atSeptember 30, 2020 from$593.5 million atDecember 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 September 30, 2020 .
39--------------------------------------------------------------------------------
Table of Contents Net Operating Loss Carryforwards AtDecember 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 throughDecember 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. Effects of Inflation 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, our financing plans, and the projected impact of, and response to, the COVID-19 coronavirus pandemic and the related downturn of theU.S. and global economies 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 Cytiva (formerlyGE Healthcare ),MilliporeSigma and Purolite; 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 allU.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 and the operations of our customers and suppliers; 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 theSecurities and Exchange Commission including under the sections entitled "Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2019 and our Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2020 .
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