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Billions of people around the world will be celebrating New Year's when the clock strikes midnight on Jan. 1. But investors in bioprocessing company Repligen (NASDAQ: RGEN ) may not be in such a celebratory mood: The company is set to lose an important revenue stream from royalties on U.S. sales of the rheumatoid arthritis drug Orencia from Bristol-Myers Squibb (NYSE: BMY ) when a settlement runs its course at the conclusion of the fourth quarter of 2013. Should investors be worried? Can a licensing agreement with Pfizer (NYSE: PFE ) for Repligen's former spinal muscular atrophy, or SMA, product candidates replace Orencia royalties? Let's review.
Orencia by the numbers
Repligen scored an exclusive license to develop CTLA4, an immune system regulator, in the 1990s from the University of Michigan. Early work with the university and the U.S. Navy had shown promise for using a fusion protein containing the compound to treat autoimmune diseases. The company was awarded U.S. patent No. 6,685,941, although its work never entered into the clinic. Luckily, that single patent would not go completely to waste.
In 2006, Repligen and the University of Michigan asserted that Bristol's drug Orencia, a CTLA4 compound, was covered by its intellectual property. The three agreed to a settlement in 2008 for tiered royalties on the following schedule of U.S. sales:
- 1.8% on the first $500 million in sales
- 2% on the next $500 million in sales
- 4% on all sales over the first $1 billion
Due to the exclusive license with the University of Michigan, 15% of all royalty revenue collected by Repligen is paid to the institution. Nonetheless, it has represented an important revenue stream for the company. Orencia recorded U.S. sales of nearly $800 million in 2012, which netted Repligen $14.8 million in revenue. That figure is expected to grow by several million this year before vanishing completely in 2014.
What does this all mean? Essentially, next year Repligen will lose what amounted to 25% of its total revenue in 2013. That will affect things such as cash flow, revenue, and income. So if you're an investor relying on metrics such as P/E and P/S, you may be a little disappointed as the year progresses and Orencia royalties get squeezed out of trailing 12-month metrics.
However, Repligen's business will not be affected, and will remain cash flow positive and strongly profitable without the royalties. Remember, gross product margin will come in at 50% this year before settling in at 55% next year.
It's also important to remember that the royalties have contributed mightily to the company's cash pile, which is expected to weigh in at $68-$70 million at the end of 2013. That will allow management substantial positioning should external growth opportunities arise. Don't forget, the company's manufacturing base in Sweden and OPUS chromatography columns were added through acquisitions over the years.
Perhaps most important is the fact that the company is projecting to grow bioprocessing product sales by 10%-15% per year. That should be the new focus for investors going forward.
Pfizer to the rescue?
In January Repligen announced that it had entered into a $70 million collaboration with Pfizer to develop its SMA program. The out-licensing netted the company a $5 million upfront payment while a $1 million milestone was achieved during the third quarter. There is quite a long road ahead for Pfizer, but Repligen could generate sizable milestone and royalty revenue in the next few years if the program is successful.
While there may be a healthy amount of milestone payments involved in the Pfizer collaboration, the unpredictability and lengthiness of clinical trials makes it impossible to count on SMA products replacing Orencia's lost revenue. I would focus on bioprocessing product sales growth and count milestone payments as freebies. If they happen, great. If not, it's not the end of the world.
Foolish bottom line
The end of Orencia royalties in 2014 certainly represents a financial setback for investors and Repligen. If you look at year-over-year comparisons for total sales and income for any quarterly period next year, you'll see a noticeable dip. The important thing to remember is that the company will continue to grow its core bioprocessing business (product sales), has plenty of cash in the coffers, and may look to make a strategic acquisition to further bolster top and bottom line growth. Just be aware that Mr. Market may not be so kind.
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