Repligen Corp (RGEN) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2012 Repligen Corporation earnings conference call. My name is Shaquana, and I will be your coordinator for today. (Operator Instructions). I would now like to turn the presentation over to your house for today's call, Mr. Bill Kelly, Chief Financial Officer. Please proceed, sir.

Thank you and good morning. The purpose of today's call is to discuss our announcement of Q2 2012 results in our announcement today to focus our business on Bioprocessing. Joining me today is Walter Herlihy, our President and CEO.

At the outset I would like to state that this discussion may contain forward-looking statements. These statements are subject to risks and uncertainties which may cause our plans to change or results to vary. In particular, unforeseen events outside of our control may adversely impact future results.

Additional information concerning these factors is discussed in our annual report on Form 10-K, the current reports on Form 8-K we filed today, and other filings we make with the Securities and Exchange Commission. Except as required by law, we assume no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

Now I will turn the call over to Walter Herlihy to comment on our strategy.

Thank you, Bill. Today we announced a strategic decision to focus our resources on the growth of our Bioprocessing business. Our Bioprocessing business is based on the development and manufacture of high value consumables which are used to manufacture biologic drugs, including monoclonal antibodies.

This decision by our Board and management is based on 5 key factors. First, our current business is well positioned in an attractive growth area, namely the expanding market for biologic drugs, and particularly the market for monoclonal antibodies.

Our December 2011 acquisition and successful integration of Repligen Sweden provides us a critical mass of products which will enable us to grow with this market. There are approximately 30 monoclonal antibodies on the market today and 300 additional monoclonals in development, for an ever-expanding range of clinical indications. If even a small fraction of these become significant products, the market for monoclonal antibodies will expand significantly and drive future growth in demand for Protein A products, which we manufacture. We have also made investments to enable us to participate in other high-growth areas in Bioprocessing, such as disposable technologies for biomanufacturing.

Second, Repligen has established a leading brand in the Bioprocessing industry. We have significant internal technical expertise in Bioprocessing, which has been developed for more than a decade and which is recognized across the life sciences industry. We are a technology partner of choice that the market leaders turn to for collaboration on the development, scale-up, and manufacturing of new Protein A related products.

Third, we have established relationships, including long-term manufacturing and supply agreements with world-class partners, including GE Healthcare, EMD Millipore, and Sigma-Aldrich. These agreements enable us to benefit from the global marketing reach of these organizations and operate our business more efficiently.

Fourth, our Bioprocessing business does not carry the uncertainty and risk associated with any single clinical trial outcome or regulatory decision. And finally, we believe that with the full focus of management, we can identify additional opportunities to grow our Bioprocessing franchise through a combination of continued sales growth for existing products; co-development of new products with existing partners; product innovation, including additional disposable technologies for biomanufacturing; and a selective acquisition of products or companies to expand our product portfolio.

We believe that these 5 factors -- the expanding Biologics market, our expertise, our partnerships with long-term supply agreements, low regulatory risk, and new growth opportunities provide a compelling rationale to support our decision to focus on our Bioprocessing business.

We also believe that this decision is in the best interest of shareholders, as it provides a clear investment thesis to attract new investors who want exposure to this rapidly growing marketplace without the binary risk inherent in pharmaceutical product development.

Now I will turn the call over to Bill Kelly, who will discuss our second-quarter results, after which I will provide additional details on our near-term plans.

Thank you, Walt. This morning we reported results for the second quarter ended June 30, 2012. For the quarter we recorded Bioprocessing product revenue of $11.6 million, an increase of $7.3 million, up 168% from the prior year.

Revenue was driven by the addition of Repligen Sweden and strong organic growth of our Bioprocessing business. Total revenue for the quarter, including royalty and research revenue, was $15.5 million, an increase of 103%. Net income for the quarter was $1.6 million or a gain of $0.05 per diluted share compared to a net loss of $55,000 or $0.00 per share for the quarter ended June 30, 2011.

For 2012 we are now projecting Bioprocessing product revenue of $41 million to $43 million and currently project total revenue of approximately $55 million to $57 million, which represents the second increase in our projections this year. For the year we are now projecting GAAP net income of $5 million to $7 million.

Our expenses for 2012 include $4.3 million of non-cash expenses, including depreciation, amortization, and stock option expenses. Research and development expenditures for the quarter were $2.9 million or 25% of product revenue compared to 81% of product revenue in Q2 of the prior year. These results demonstrate the significant positive impact our acquisition of Novozymes Biopharma AB has had and the dramatic progress we have made in the past year of transforming our business from a product development model to an integrated commercial organization.

Going forward into 2013 we expect to continue a downward trend on R&D expenditures, with R&D expenses at around 10% to 20% of revenue once our partnering efforts are complete. While the Company does currently have over $60 million in net operating loss carryforwards and other tax credits available to reduce future US income taxes, we recorded a tax provision of $200,000 or 8% of pretax income to primarily reflect profits earned in our Swedish subsidiary, for which we cannot utilize those credits. Finally, we expect to end the year with approximately $43 million in cash.

I will now turn to call back over to Walter Herlihy for an update on our Bioprocessing business and development programs.

Thanks, Bill. During the second quarter we completed contract development of a commercial scale manufacturing process for a new, highly selective affinity ligand from GE Healthcare Life Sciences. An affinity resin based on this product was recently launched by GE for the purification of antibody fragments, which are gaining attention as potential future pharmaceuticals because they offer a number of advantages over a full-length monoclonal antibodies, such as improved tissue penetration. Several other new product development programs are either ongoing or in negotiation with multiple life sciences companies.

As I mentioned in my opening remarks, this is evidence that our established technology leadership position in the Protein A related market. This year we have also initiated several other Bioprocessing R&D investments, including a project to expand the OPUS product line based on direct feedback from customers and collaborations with others to identify new media for single-use chromatography. We have also carried out multiple projects to identify specific improvements in the manufacturing processes for several of our products, which have the potential to improve the efficiencies in manufacturing in 2013 and beyond.

Turning now to RG1068, our decision to focus on Bioprocessing necessarily means we will reduce our development efforts on RG1068, our agent for pancreatic imaging. We continue to believe that this is a safe and effective imaging agent with the potential to reduce healthcare costs. However, given the momentum and the opportunities we see in our core Bioprocessing business, we believe that halting further direct investment in the RG1068 program is in the best interest of the Company and our shareholders.

We intend to seek a partner for further development of RG1068 and will not independently initiate additional clinical studies. We are currently preparing a phase 3 clinical protocol which we plan to discuss with the FDA in the coming months. We believe that the FDA's feedback on our clinical study plan will help clarify a path to product approval for a potential partner. In line with this strategy, we have decided to withdraw our marketing authorization application in the European Union.

For our CNS pipeline, we have also decided to reduce our efforts in the development of RG3039 for spinal muscular atrophy and the investment in our HDAC program for Friedreich's ataxia and potentially other indications. We will continue to support enrollment of patients in our active phase 1 trial of RG2833 for Friedreich's ataxia. This 20-patient trial is being conducted in patients with Friedreich's, and in addition to pharmacokinetics and safety results, we are monitoring several biomarkers of response which if positive could materially improve the value of this program. We are working on a detailed transitional plan for these programs that will meet the best needs of all stakeholders, including our nonprofit partners, who have partially supported our prior and ongoing efforts.

In summary, we are committed to growing a best-in-class life sciences company focused on the development, manufacturing, and sale of high-value consumables for the growing biomanufacturing market. We believe we have the expertise, facilities, partners, and strategy to be successful in growing this business through a combination of internal innovation, the development of new products for partners, and acquisitions.

We look forward to updating you on our progress. I will now turn to call over to the operator for our question-and-answer period.

(Operator Instructions). Scott Gleason, Stephens.

Congratulations on the really strong quarter here and the impressive results in the Bioprocessing business. Just first off, Walt, when we look at the quarter here and the growth rate that you guys saw in Bioprocessing, can you give us a little bit of a sense for how much Novozymes contributed, if we were to look at the organic growth for your core business prior to the Novozymes transaction?

Sure, Scott. If we take a look on a pro forma basis of 2012 versus 2011, we anticipate an organic growth rate for the combined businesses of between 15% and 20% this year.

Okay. So, obviously, Walt, that is quite a bit faster than probably the market growth rate right now, when you look at the monoclonal antibodies side on the volume basis. Can you give us a little bit of a sense for where some of that additional growth is coming from? You guys mentioned the OPUS pre-packed columns on the call. Maybe -- can you give us a little more granularity on where you are seeing some of the strength there?

Yes. Three things are driving that, Scott. The first is that while the dollar-denominated market for all monoclonal antibodies is growing in the high single digits, we are seeing demand due to the tremendous explosion or number of clinical trials that are being done for monoclonals. That is helping drive the Protein A segment of our business faster than the overall growth.

The second is that, as you know, we have introduced some new products this year, so those are contributing incrementally to the growth. And thirdly, as I alluded to, we are receiving some revenue from R&D contracts that are operated with some large life sciences companies in which they pay us to do R&D, and then in exchange we have the right to manufacture products for a defined period of time. So we've got a couple of those. There has been an uptick in interest in doing those kinds of projects, and those are also contributing to our numbers in 2012.

Great. And then I think the decision to basically look for a partner for SecreFlo makes a lot of sense in terms of prioritizing assets here. I guess, first off, when we look at a licensing deal for that drug, how are you guys thinking about what that could look like in terms of upfront payments, potential milestones, royalty rates?

It is difficult to speculate on that, Scott. It is kind of a unique product, as you know. I think first and foremost, our objective is to ensure the product moves forward and that the R&D is supported by a partner. And so that would be first and foremost. I think for us, we believe in the product and we would be happy to take a substantial part of compensation in milestone payments based on, for example, regulatory approvals or reaching certain market benchmarks and/or royalties.

Okay great. And then just last question -- I guess when we look at the Bioprocessing piece, if I recall, your R&D tied to that segment as a percentage of revenue is kind of in the single-digits. So I guess when we look at the trajectory of R&D over the longer term, is the reasonable expectation that we get down to that level over a couple of year time horizon here? I know you guys mentioned on the call -- you gave a little bit of granularity around that, but can you restate where those, as a percentage of revenue, you would expect that the trend over the next 2 years here?

So we look ahead into 2013 and we think about the R&D revenue, as Bill mentioned, the guidance there now is between 10% and 20% of revenue once we have transitioned to a full, sole Bioprocessing operating mode.

And again, that R&D expense line is -- as I noted in the call, part of that is the expense associated with carrying out revenue-generating contracts for partners as opposed to pure R&D for new product development. So to the extent we have a lot of contacts in place, we might trend to the higher end, but those are revenue-generating, of course. And in the absence of those kinds of collaborative revenue-generating contracts, we tend to trend toward the lower end of that range.

And so I guess the right way to think about that, Walt, is we would see offsetting revenue benefits associated with those over time?

For a portion of it.

Okay, great. Thanks for taking my questions.

(Operator Instructions). Michael Wood, LSA.

Good morning. I think you have expressed an interest in bolt-on acquisitions to expand the Bioprocessing business in the past, as a way to reach critical mass revenue and improve margins. Can you help us understand what is the company profile that you would consider to be a fit for Repligen, and how would you finance such an acquisition?

Okay, to the first part of your question, we primarily would look for products and/or companies in tight adjacencies to the markets we are participating in and the products we are developing now. So we would not consider doing Bioprocessing acquisitions to buy, for example, a capital equipment company, or a contract manufacturing organization.

We want to stay focused on the consumables using biomanufacturing. As the Novozymes acquisition did, it allowed us to expand from consumables just used for purification of antibodies to, for example, fermentation growth factors. So that would be an example of a logical adjacency which has the same customers, the same technology.

On the financial side, we would look for companies of a size that could appreciably improve our top-line results and which don't have to be accretive immediately, but have a path to being ultimately an accretive acquisition from a profits point of view. We are not looking to buy companies that are purely in R&D mode. They'd have to be at a minimum EBITDA positive to meet our criteria.

And then the financing of such a transaction?

Well, that would really depend on the details. Obviously we can use cash that we have in hand. It's -- potentially contingent value rights, whether they are earnouts or royalties, and in some cases equity may be involved as well.

Great. Thanks, Walter. Congratulations on a good quarter.

Ron Chez.

Good morning. On some of your going-forward estimates and the improved prospect for growth, in prior conference calls -- and you just spoke to this -- you would expect R&D to be in the neighborhood of 10% to 20%, trending lower, though, if nothing else was going on towards the 10%, right?

That is the range. That's right.

And SG&A -- you had previously talked about 10%.

10% was an allocated number of SG&A. Our SG&A is -- let's break that down. Our G&A is about $10 million or so as a public company, and we have sales and marketing that is devoted to Bioprocessing of several million dollars.

And G&A is $10 million?

Correct. Right.

And your expectation, if you are getting to -- and it looks like you can get there quicker -- to $50 million in sales -- or what would you expect? What is your goal for cost of goods sold?

Well, ultimately, our goal is to approach a 50% target. That will take some time as we implement some of the innovations that I spoke about in the call where we work to improve yields, improve utilization of capacity, manufacturing capacity, and people. And so that is a process that will ripple through the P&L in 2013 and 2014.

(Operator Instructions). Paul Avery, FARA.

Good morning, Walt. I have been a shareholder of Repligen for several years, a Board member of FARA and a parent of 2 children with Friedreich's ataxia. We have been a staunch advocate.

Just a couple of comments followed by a question here. You know, FARA has been staunch supporters of Repligen for a number of years and have been really excited about the potential powerful benefit that the HDAC program possesses, having the orphan disease status, the fast-track approvals, and the exclusivity provided -- from a European standpoint as well as domestically, it could be significant for the Company, as you well know. The market potential, we believe, has been quantified at approximately $0.5 billion just for FA. If you add in SMA, it is close to $1 billion. So being first to market does provide significant benefits here.

So certainly disappointed to hear about the pullback on that. I understand you are making a business decision, but disappointed about any delay that would be in this program. It is good news to hear that you are continuing the efforts in Italy, and we support that, and we are 60% through that program today.

If you do see -- the question is -- actually two. What is detailed transitional plan mean that you mentioned? And if the Company does see benefit in the Italy trials, what is the likelihood of continuation in Italy? And then, is there any likelihood of an effort to take this domestically and to capitalize on the potential for Repligen?

Sure. First, certainly, we at Repligen appreciate the funding we have gotten from FARA and other organizations that have helped move these programs along, and we do have funding from another organization for the clinical study in Italy, and we intend to continue to do that, because as you say, we are already halfway through that process.

My feeling is, Paul, that as I mentioned in my prepared remarks, that if we are able to obtain a biomarker result, in other words, treatment of a Friedreich's ataxia patient with 2833 causes the biochemical abnormalities one can observe to be corrected, that will provide a launching pad for attracting much more significant resources to this program through the mechanism of partnering.

And so we are committed to getting as much of the information as possible into our package, which we could then use for partnering. And that is something that we are going to strive to do between now and the end of the year.

Okay. And we do have a -- there is that follow-up compound that is believed to be an approved compound that we could use domestically. So it sounds as though the transitional plan would include a different partnership at that point, if there is success in Italy.

I think that is really the key. Success in that clinic will open the door to potentially a very significant partnership.

Thousands of people counting on your continued support, so thank you, Walter, and I enjoy being a supporter.

(Operator Instructions). At this time, I would like to turn the call over to Mr. Walter Herlihy for closing remarks.

Okay, I would like to thank everyone for participating on today's call, and as always, if you have follow-up questions please feel free to contact the Company though Investor Relations. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.