Repligen Triples Earnings, but Bad News Awaits in 2014

The small company supplying the biotech industry, namely pharmaceutical companies producing monoclonal antibodies, continued its steady pace of growth in the third quarter with rising bioprocessing product sales and a giant kick from royalties. That wasn't all Repligen (RGEN -2.00%) had to report, however. It's also preparing to launch a larger version of its OPUS Series chromatography columns in the first quarter of next year, which have already garnered interest from potential customers. A growing product portfolio will be important if the company wants to successfully diversify away from its dependence on distributors such as General Electric (GE -2.11%), Sigma-Aldrich (NASDAQ: SIAL), and Thermo Fisher Scientific (TMO 0.49%).

The solid quarter further validates management's shift to a commercial products company, but there are big questions looming on the horizon. What does the company's growth trajectory look like? What happens when royalty revenue from Bristol-Myers Squibb (BMY -0.27%) stops rolling in at the end of the year? Let's dig in.

Financials
Investors can look at the company's press release (link opens PDF) for full financial results, but here are the numbers I'm focusing on:

Source: Repligen 3Q13 press release.

Product revenue climbed 10% from last year's third quarter, but the 46% leap in total revenue was mostly in response to increases in royalty revenue. That was also a big driver for the 228% jump in net income and more than doubling of cash, although investors have to respect a 16% fall in operating expenses, too. Management is continuing to lower the costs of doing business as it learns how to more efficiently run a global business with manufacturing capacity in Waltham, Mass., and across the pond in Sweden.

Investors will also enjoy bioprocessing product gross profit margin of 53.5% compared to just 42.3% for the prior-year period. Management noted that the gains were largely due to drawing down lower cost, post-acquisition inventory during the quarter, which means margins near 50% should be here to stay with the current product mix.

Manufacturing expansion
Repligen announced that it completed a 9,000-square foot expansion of its Waltham manufacturing facility on November 1, but I thought I would wait until earnings today to discuss its broader impacts. The move more than doubled the company's capacity for producing OPUS Series chromatography columns, will allow for even better quality control and consistency measures to be enacted for the product, tripled warehouse space, and added dedicated purification and fermentation laboratories for R&D purposes. The company has also reserved an additional 17,000 square feet for future expansion, which means Waltham won't be holding back the growing company anytime soon.

The expansion will have an impact on biologic bioprocessing products, but investors should see the largest benefits with OPUS columns. Repligen is finalizing the design of a 45 cm diameter column -- currently offers 20 cm and 30 cm diameter columns -- that will have twice the capacity of present offerings and become the largest plug-and-play chromatography columns sold in the industry. The company's sales team has already begun fielding inquiries into the new product -- a rarity in an industry in which new products usually experience months of lag time as companies perform tests and quality checks.

The $100-million-per-year market for consumable chromatography products is ripe for disrupting -- and Repligen is poised to make the biggest move. To expedite the process, management hinted at greatly increasing its internal sales force in 2014 to access a broader range of customers. That should be music to the ears of investors, especially given the fact that GE Healthcare, EMD Millipore, Sigma-Aldrich, and Thermo Fisher Scientific (Life Technologies) combine to make up more than 64% of total sales. More sales representatives should allow the company to sell more products directly to biopharmaceutical companies instead of the distributors listed above and may even lead to the formation of strategic collaborations.

There is a synergistic relationship between the five companies, but overdependence is always a risk. GE Healthcare and EMD Millipore manufacture the beads to which Repligen's Protein A media is chemically bound. The combined media is then packed into chromatography columns -- even the company's OPUS columns -- that are used to purify monoclonal antibody therapeutics.

Meanwhile, Sigma-Aldrich and Life Technologies use the company's growth factors, which are added during fermentation to increase the production of monoclonal antibodies. It may be a behind the scenes collaboration, but Repligen's Long R3 IGF-1 growth factor is currently used in the manufacture of at least 9 commercial biopharmaceutical products.

For a brief recap of Repligen's biologic product offerings, read my recent introductory article.

Outlook
The company slightly raised its expectations for 2013 total revenue, which will now fall between $67 million-$68 million. Bioprocessing revenue is expected to hit up to $48 million, while income should come in around $21 million-$22 million. Repligen management wouldn't commit to 2014 guidance before gauging the outlooks of top customers GE Healthcare, Sigma-Aldrich, and Thermo Fisher Scientific. However, the corporate brass did say it expects to grow product sales by 10%-15% and remain solidly profitable.There is no reason to believe product gross margins will fall significantly, but the biggest risk comes from vanishing royalties on Orencia from Bristol-Myers. And when I say vanish, I mean zero. That could result in as much as $37 million less in royalty revenue next year and significantly erode the company's bottom line. I'll discuss the company's biggest short term threat in more detail in my next article. 

Foolish bottom line
Repligen had an amazing quarter and shocked analysts with a bioprocessing gross profit margin of 53.5%. The company has also made tremendous progress expanding its manufacturing capacity and developing its next-generation OPUS Series chromatography columns, which will boost product revenue almost immediately after launch and for several years to come. Given the large and growing cash position, I wouldn't be surprised if management moves to make a strategic growth acquisition or two in the short term to better compete with larger peers. If an attractive opportunity exists, the company will surely pounce.

I've worked to establish some great reasons to consider Repligen as a long-term investment -- the opportunity in monoclonal antibodies, OPUS Series columns -- and I'm surely not done, but my next article will look into some of the risks involved at the company. Check back soon as we acknowledge some of the pitfalls of Repligen's business and what it can do to mitigate those risks.