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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Repligen Corporation    RGEN

REPLIGEN CORPORATION

(RGEN)
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REPLIGEN : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

07/30/2020 | 06:45pm EDT

Overview

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 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 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.
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.

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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&GT").
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.
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 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 TangenXTechnology 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

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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 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 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 in Europe and Asia, 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 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
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.
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.
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 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.

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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 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.
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 currently sold through a distribution partnership with
MilliporeSigma.
Engineered Molding Technology Acquisition
On June 26, 2020, the Company entered into a Membership Interest Purchase
Agreement with Engineered Molding Technology LLC ("EMT"), a New York limited
liability company and Michael Pandori and Todd Etesse, the legal and beneficial
owners of EMT to purchase EMT, which transaction subsequently closed on July 13,
2020 (the "EMT Acquisition").
EMT, which is headquartered in Clifton 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 will complement and expand
Repligen's
single-use
product offerings.
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.
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.

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Revenues
Total revenue for the three and six months ended June 30, 2020 and 2019 were as
follows:

                                      Three Months Ended                                             Six Months Ended

                                           June 30,                 Increase/(Decrease)                  June 30,                 Increase/(Decrease)
                                       2020          2019         $ Change         % Change         2020          2019          $ Change         % Change
                                                                      (Amounts in thousands, except for percentage data)
Revenue:
Products                            $   87,432$ 70,670$     16,762            23.7 %    $ 163,492$ 131,282$     32,210            24.5 %
Royalty and other                           30           22                8            36.4 %           60            44               16            36.4 %

Total revenue                       $   87,462$ 70,692$     16,770            23.7 %    $ 163,552$ 131,326$     32,226            24.5 %



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 74% and 71% of our product revenue for
the three months ended June 30, 2020 and 2019, respectively, and represented
approximately 75% and 72% of our product revenue for the six months ended
June 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 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 and six months ended June 30, 2020, product revenue increased
by $16.8 million, or 24% and $32.2 million, or 25%, as compared to the same
periods of 2019. The increase is due to the continued adoption of our products
by our key bioprocessing customers, particularly our chromatography and
filtration products. During the second quarter of 2020, we experienced an
increase in overall sales as a result of accelerated demand for our proteins 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 six months ended
June 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 $5.5 million increase in revenue for the three months
ended June 30, 2020 and a $12.1 million increase in revenue for the six months
ended June 30, 2020, as compared to the same periods of 2019, due to revenues
generated by C Technologies, which was acquired in May 2019.
Royalty revenues
Royalty revenues in the three and six months ended June 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.

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Costs of product revenue and operating expenses
Total costs and operating expenses for the three and six months ended June 30,
2020 and 2019 were comprised of the following:

                                        Three Months Ended                                             Six Months Ended

                                             June 30,                 Increase/(Decrease)                  June 30,                 Increase/(Decrease)
                                         2020          2019        $ Change         % Change          2020          2019          $ Change         % Change
                                                                        (Amounts in thousands, except for percentage data)
Cost of product revenue               $   36,863$ 30,708$    6,155             20.0 %     $  68,845$  57,553$     11,292            19.6 %
Research and development                   4,336        5,231           (895 )          (17.1 %)        9,038         8,851              187       

2.1 % Selling, general and administrative 26,726 23,699 3,027

             12.8 %        54,226        42,697           11,529       

27.0 %


Total costs and operating expenses    $   67,925$ 59,638$    8,287             13.9 %     $ 132,109$ 109,101$     23,008            21.1 %



Cost of product revenue
Cost of product revenue increased 20.0% and 19.6% in the three and six months
ended June 30, 2020, compared to the same periods of 2019, due primarily to the
increase in product revenue mentioned above. Additional facility costs,
including personal protection equipment purchased for essential manufacturing
personnel on site to protect against
COVID-19,
were incurred during the three and six months ended June 30, 2020.
Gross margins were 57.9% in both the three and six months ended June 30, 2020.
The gross margin for the three and six months ended June 30, 2019, which include
$1.2 million of amortization on an inventory
step-up
recorded in purchase accounting related to the C Technologies Acquisition in May
2019, were 56.6% and 56.2%, respectively. Excluding the
step-up
amortization, gross margins for the three and six months ended June 30, 2019
were 58.2% and 57.1%. The decrease in gross margins, excluding the inventory
step-up
amortization, in the three months ended June 30, 2020, as compared to the same
period of 2019, is a result of an increase in manufacturing headcount subsequent
to June 30, 2019, including a full quarter of C Technologies employees. The
increase in gross margin during the six months ended June 30, 2020, as compared
to the same period of 2019, excluding the inventory step up amortization 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 to June 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.
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 decreased 17.1% during the three months ended June 30, 2020,
compared to the same period of 2019. The decrease during the period is primarily
due to a decrease in R&D spending on projects, as most R&D personnel worked
remotely during the three months ended June 30, 2020 due to
COVID-19.
The decrease was also due to higher milestone payments made to Navigo Proteins
GmbH during the three and six months ended June 30, 2019. This is partially
offset by a $0.5 million increase in R&D expenses related to C Technologies'
operations during the three months ended June 30, 2020, as compared to the same
period of 2019.
R&D expenses increased 2.1% during the six months ended June 30, 2020, compared
to the same period of 2019. The increase during the period is primarily due to
the addition of $1.4 million in R&D expenses related to C Technologies'
operations and increased costs associated with an increase in R&D headcount,
including an increase in stock-based compensation expense, which also increased
due to the higher share price period over period.
We expect our R&D expenses for the remainder of 2020 to 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.

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During the three and six months ended June 30, 2020, SG&A costs increased by
$3.0 million, or 12.8%, and $11.5 million, or 27.0%, as compared to the same
periods of 2019. The increase is partially due to a full three months and a full
six months of SG&A costs from C Technologies' operations, which contributed an
additional $2.8 million and $7.6 million for the three and six months ended
June 30, 2020, respectively. The increase for each period is also 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 increased during the three and
six months ended June 30, 2020, as compared to the same period in 2019,
resulting from an increase in headcount and higher share prices period over
period.
Other expenses, net
The table below provides detail regarding our other expenses, net:

                                       Three Months Ended                                              Six Months Ended

                                            June 30,                  Increase/(Decrease)                  June 30,                 Increase/(Decrease)
                                       2020           2019         $ Change         % Change          2020          2019         $ Change         % Change
                                                                       (Amounts in thousands, except for percentage data)
Investment income                    $     253$  1,005$      (752 )         (74.8 %)    $  1,617$  1,718$      (101 )          (5.9 %)
Interest expense                        (3,004 )      (1,743 )         (1,261 )          72.3 %       (5,980 )      (3,469 )         (2,511 )          72.4 %
Other expenses                            (766 )        (697 )            (69 )           9.9 %         (384 )        (339 )            (45 )          13.3 %

Total other expense, net             $  (3,517 )$ (1,435 )$    (2,082 )         145.1 %     $ (4,747 )$ (2,090 )$    (2,657 )         127.1 %



Investment income
Investment income includes income earned on invested cash balances. The decrease
of $0.8 million and $0.1 million for the three and six months ended June 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 recent 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 six months ended June 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.
Interest expense
Interest expense in the three and six months ended June 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 six months ended June 30, 2019
is from our 2016 Notes, which were settled during the third quarter of 2019.
Interest expense increased $1.3 million and $2.5 million for the three and six
months ended June 30, 2020, as compared to the same periods in 2019.
The amortization of debt issuance costs on the 2019 Notes was $2.7 million and
$5.4 million for the three and six months ended June 30, 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 and $2.2 million for the three and six months ended June 30, 2019
for which there was no comparable amount recorded during the same period of
2020.
Contractual coupon interest incurred on the 2019 Notes for the three and six
months ended June 30, 2020 was $0.3 million and $0.5 million, respectively.
There were no comparable amounts for the same period of 2019. Contractual coupon
interest incurred on the 2016 Notes was $0.6 million and $1.2 million in the
three and six months ended June 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 six months ended June 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.

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Income tax provision
Income tax provision for the three and six months ended June 30, 2020 and 2019
was as follows:

                                         Three Months Ended                                              Six Months Ended

                                              June 30,                  Increase/ (Decrease)                 June 30,                 Increase/ (Decrease)
                                         2020           2019         $ Change          % Change          2020         2019         $ Change          % Change
                                                                         (Amounts in thousands, except for percentage data)
Income tax provision                   $    159$ 1,524$    (1,365 )          (89.6 %)    $  1,020$ 3,987$    (2,967 )          (74.4 %)
Effective tax rate                          1.0 %         15.8 %                                            3.8 %       19.8 %


For the three and six months ended June 30, 2020, we recorded an income tax
expense of $0.2 million and $1.0 million, respectively. The effective tax rate
was 1.0% and 3.8% for the three and six months ended June 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 six months ended
June 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 restricted stock
units. We recorded a tax provision of $1.5 million and $4.0 million for the
three and six months ended June 30, 2019. The effective tax rate was 15.8% and
19.8% for the three and six months ended June 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 six months ended June 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 restricted 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.
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. The
following is a reconciliation of income from operations in accordance with GAAP
to
non-GAAP
adjusted income from operations for the three and six months ended June 30, 2020
and 2019:

                                           Three Months Ended          Six Months Ended

                                                June 30,                   June 30,
                                            2020          2019         2020         2019
                                                      (Amounts in thousands)
GAAP income from operations              $   19,537$ 11,054$ 31,443$ 22,225
Non-GAAP
adjustments to income from operations:
Acquisition and integration costs             2,134        4,822        4,687        6,621
Intangible amortization                       3,874        3,051        7,752        5,662
Inventory
step-up
charges                                          -         1,169           -         1,169

Non-GAAP

adjusted income from operations $ 25,545$ 20,096$ 43,882$ 35,677




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 and
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 six months ended June 30, 2020 and 2019:

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                                                            Three Months Ended June 30,
                                                     2020                                 2019
                                                        Fully Diluted                        Fully Diluted

                                                        Earnings per                         Earnings per

                                         Amount             Share             Amount             Share
                                                   (Amounts in thousands, except per share data)
GAAP net income                         $ 15,861       $          0.30       $  8,095       $          0.17
Non-GAAP
adjustments to net income:
Acquisition and integration costs          2,134                  0.04          5,322                  0.11
Intangible amortization                    3,874                  0.07          3,051                  0.06
Inventory
step-up
charges                                       -                     -           1,169                  0.02
Non-cash
interest expense                           2,724                  0.05          1,124                  0.02
Tax effect of intangible
amortization and acquisition costs        (2,085 )               (0.04 )       (2,610 )               (0.05 )

Non-GAAP
adjusted net income                     $ 22,508       $          0.42       $ 16,151       $          0.33




                                                             Six Months Ended June 30,
                                                     2020                                 2019
                                                        Fully Diluted                        Fully Diluted

                                                        Earnings per                         Earnings per

                                         Amount             Share             Amount             Share
                                                   (Amounts in thousands, except per share data)
GAAP net income                         $ 25,676       $          0.48       $ 16,148       $          0.34
Non-GAAP
adjustments to net income:
Acquisition and integration costs          4,687                  0.09          7,121                  0.15
Intangible amortization                    7,752                  0.15          5,662                  0.12
Inventory
step-up
charges                                       -                     -           1,169                  0.02
Non-cash
interest expense                           5,415                  0.10          2,231                  0.05
Tax effect of intangible
amortization and acquisition costs        (4,262 )               (0.08 )       (3,961 )               (0.09 )

Non-GAAP
adjusted net income                     $ 39,268       $          0.74       $ 28,370       $          0.59



* 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 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 and six months ended June 30, 2020 and 2019:

                                      Three Months Ended            Six Months Ended

                                           June 30,                     June 30,
                                      2020           2019          2020          2019
                                                  (Amounts in thousands)
GAAP net income                     $  15,861$  8,095$ 25,676$ 16,148
Non-GAAP
EBITDA adjustments to net income:
Investment income                        (253 )      (1,005 )      (1,617 )      (1,718 )
Interest expense                        3,004         1,743         5,980         3,469
Tax provision                             159         1,524         1,020         3,987
Depreciation                            2,578         1,762         5,063         3,337
Amortization                            3,902         3,079         7,807         5,716

EBITDA                                 25,251        15,198        43,929        30,939
Other
non-GAAP
adjustments:

Acquisition and integration costs 2,134 5,322 4,687

      7,121
Inventory
step-up
charges                                    -          1,169            -          1,169

Adjusted EBITDA                     $  27,385$ 21,689$ 48,616$ 39,229




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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 June 30, 2020, we had cash and cash equivalents (excluding restricted cash)
of $560.4 million compared to cash and cash equivalents (excluding restricted
cash) of $528.4 million at December 31, 2019.
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 in July 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,
"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 second 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 third 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 $238.2 million and are classified as
long-term liabilities on the Company's consolidated balance sheet as of June 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 acquisition of Engineered Molding Technology in
July 2020 as 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

                                                  Six Months Ended
                                                                               Increase/(Decrease)
                                                      June 30,
                                                2020            2019                $ Change
                                                             (Amounts in thousands)
Operating activities                          $ 26,265$   27,577       $                 989
Investing activities                            (9,517 )       (191,305 )                   181,788
Financing activities                             5,402          190,172                    (184,770 )
Effect of exchange rate changes on cash,
cash equivalents and restricted cash               807           (2,449 )                       955

Net increase in cash, cash equivalents and
restricted cash                               $ 22,957$   23,995       $              (1,038 )



Operating activities
For the six months ended June 30, 2020, our operating activities provided cash
of $26.3 million reflecting net income of $25.7 million and
non-cash
charges totaling $24.8 million primarily related to depreciation, amortization,
deferred income taxes,
non-cash
interest expense and stock-based compensation charges. An increase in accounts
receivable consumed $6.0 million of cash and was primarily driven by the 24.5%
year-to-date
increase in revenues. An increase in inventory consumed $15.0 million to support
future revenue. A decrease in accounts payable and accrued liabilities of
$4.1 million were due primarily to the payment of the $9.0 million to employees
during the second quarter of 2020 for C Technologies acquisition-related
bonuses. This is partially offset by an increase in accounts payable and accrued
liabilities due to the timing of payment of payables. The remaining cash
provided by operating activities resulted from favorable changes in various
other working capital accounts.

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For the six months ended June 30, 2019, our operating activities provided cash
of $27.6 million reflecting net income of $16.1 million
and non-cash charges
totaling $18.5 million primarily related to depreciation,
amortization, non-cash interest
expense, deferred tax expense and stock-based compensation charges. An increase
in accounts receivable consumed $7.3 million of cash and was primarily driven by
the 48%
year-to-date
increase in revenues. An increase in inventory consumed $4.1 million to support
future revenue, due to the addition of C Technologies on May 31, 2019. These
were offset by an increase in accounts payable and accrued liabilities of
$2.1 million due to the addition of C Technologies and a decrease in unbilled
receivables of $2.1 million. The remaining cash provided by operating activities
resulted from favorable changes in various other working capital accounts.
Investing activities
Our investing activities consumed $9.5 million and $9.1 million of cash during
the six months ended June 30, 2020 and 2019, respectively, related to capital
expenditures. Of these capital expenditures, $2.2 million and $3.3 million,
respectively, represented capitalized costs related to our
internal-use
software. We consumed $182.2 million in cash (net of cash received) for the C
Technologies Acquisition on May 31, 2019.
Financing activities
Cash provided by financing activities of $5.4 million for the six months ended
June 30, 2020 included proceeds from stock option exercises and the vesting of
stock units during the period. Cash provided by financing activities of
$190.2 million for the six months ended June 30, 2019 included $189.6 million
from the issuance of our common stock resulting from our public offering
completed in May 2019. Proceeds from stock option exercises during the six
months ended June 30, 2019 were $0.6 million.
Working capital increased by approximately $49.3 million to $642.8 million at
June 30, 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.

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Off-Balance
Sheet Arrangements
We do not have any special purpose entities or
off-balance
sheet financing arrangements as of June 30, 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.
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 the U.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
(formerly 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 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 the Securities and Exchange
Commission including under the sections entitled "Risk Factors" in our Annual
Report on Form
10-K
for the year ended December 31, 2019 and our Quarterly Report on Form
10-Q
for the quarter ended March 31, 2020.

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