What Should Investors Expect From Repligen in 2014?

If shares of a company doubled over a 12-month period you would probably say the company had a pretty good year. I guess that means bioprocessing product manufacturer Repligen (NASDAQ: RGEN  ) had a pretty good year. While the rise in shares can be explained by progress made in 2013, investors may be wondering if stagnant returns -- or even losses -- await in the future. After all, you can't expect your investments to double year after year. Can the company overcome the loss of an important royalty stream from Bristol-Myers Squibb (NYSE: BMY  ) and continue to power ahead in 2014? Let's review three things you can expect from Repligen next year.

1. Expiration of Orencia royalties
Poof! Gone! That's what will happen to royalties from domestic sales of rheumatoid arthritis drug Orencia when the ball drops on New Year's. It should be no surprise to investors at this point: Management has been preparing analysts and investors for this event for most of the year. It's important to note that the loss of the royalty stream won't make Repligen unprofitable or cash-flow negative. 

Nonetheless, losing Orencia royalties, which will amount to nearly one-quarter of total revenue in 2013, will affect metrics such as P/E and P/S. But you could take a glass-half-full-approach and appreciate that Orencia grew the company's cash pile. Additionally, bioprocessing product revenue is expected to grow 10%-15% annually for the foreseeable future while gross product margin will reach 55% in 2014. I don't think you should sell solely because of the expiration of the royalties, but you should be aware of it.

2. A successful launch of newest OPUS chromatography columns
Repligen completed a 9,000 square foot expansion of its manufacturing facility in Massachusetts in November, which will begin to pay dividends in the first quarter of 2014. Not a bad turnaround. The most transparent effect of the expansion will come from sales of its newest, largest OPUS Series chromatography column, or the vessel in which monoclonal antibodies are purified after production. In fact, the 45 centimeter diameter column currently being finalized will be the largest plug-and-play column in the industry and offer more than twice the capacity of the next largest. An even larger 60 centimeter column -- which will almost double capacity again -- is also in development.

Repligen is looking to lead the plug-and-play chromatograhpy market in 2014. Source: Repligen Piper Jaffray Healthcare conference presentation.

That's great, but it doesn't guarantee a successful launch. Why should you be optimistic? Repligen's sales team has already begun fielding inquiries for the new product from drug manufacturers looking to implement it immediately. It may not sound like much, but that's a rarity for new manufacturing products in the biotech industry, which typically experience months of lag time as companies perform tests and quality checks before gaining traction. The ability to purify larger volumes in a single pass will be a crucial advance for manufacturers -- and they're leaping at the new capability with OPUS.

3. The (potential) acquisition of a new product
Look around Repligen's product portfolio and you'll see a common trend: Many products were injected through acquisitions. Some of the technology implemented in the OPUS product line came from the 2010 acquisition of BioFlash Partners. All four growth factor products offered by the company can be traced to the 2011 acquisition of Novozymes Biopharma Sweeden. Ditto for the company's manufacturing capacity in Sweden (duh) for producing growth factors and Protein A ligands, the most popular product. Will management be inclined to pull the trigger on another acquisition in 2014 if the opportunity presents itself?

Added pressure to do so may come from the expiration of Orencia royalties, which will result in lower total revenue in 2014. While management is guiding for healthy growth in product revenue, it may use its relatively large cash position to strike a deal and bring in a new complimentary bioprocess product or technology. On the other hand, perhaps money is better spent on internal research and development capabilities, which have led to significant advances for its product portfolio in the past two years. 

If an acquisition is made, investors should hope that the deal makes financial sense for Repligen and wasn't the result of a trigger happy management team. There are worse things than having $70 million in the bank. 

Foolish bottom line
Repligen had a great 2013, but 2014 will pose a new set of challenges and opportunities. The company will lose royalties from Bristol-Myer Squibb's anti-inflammatory drug, although it will combat the lost revenue with healthy growth in product sales -- likely fueled by a great launch for the newest and largest OPUS Series chromatography columns. Management could even use its $70 million in cash to make a strategic acquisition to inject additional products into the company's lineup. While you shouldn't expect shares to double again in 2014, I think there is plenty of growth to look forward to in the long term.

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  • Report this Comment On December 13, 2013, at 11:10 AM, coachtom4 wrote:

    Maxx,

    I am new to this so please bear with me.

    What do you think of this back of the envelope assessment for 2014 using second grade math.

    Assume $19 million in sales for 4th qtr and income of 6 million, i.e. minimal increases from 3rd qtr. This gives 2013 annual revenues of $72 million and income of $19 million. Per your comment that 1/4 of revenue goes away from the royalties, the ongoing revenue is $54 million and the ongoing income is only $1 million. This assumes the royalties have 0 costs associated with them.

    Giving them a 12.5% revenue increase on ongoing revenue that brings revenue to $61 million. Assuming a 30% (WAG) profit margin on the increased revenue, that will increase income by $2 million for net income of $3 million.

    There are 32 million shares outstanding so the eps will be about 10 cents. This gives us a P/E of over 130 at the current price.

    I know this is not an overly complicated analysis, but just trying to get my arms around this.

    Thoughts?

  • Report this Comment On December 13, 2013, at 2:51 PM, TMFBlacknGold wrote:

    @coachtom4

    P/E and P/S will certainly move higher next year, but remember that as metrics that incorporate the prior 12 months they will still contain at least some Orencia royalties until results are in for the fourth quarter of 2014. Check out the company's own guidance and narrowed expectations for 2013 (link opens PDF):

    http://www.repligen.com/sites/default/files/news/rgen3q2013f...

    For 2013 product revenue will be between $46-$48 million this year, royalty revenue will be between $19-$21 million, operating income will be between $21-$22 million, and net income will be between $16-$18 million.

    I haven't run the numbers, but given gross product margin of over 55% I don't see a P/E approaching anywhere near 130. I'll dig deeper into what to expect and compare to such as competitors Bio-Rad in a future article.

    Also, it looks like royalty revenue is expected to be about 29% of total revenue in 2013. That's stretching the definition of "one-quarter". My apologies for overlooking that.

    Best,

    Maxxwell

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