How Will the Bottom Line Change for Repligen in 2014?

We recently analyzed what to expect from the top line for bioprocessing products company Repligen (NASDAQ: RGEN  ) in 2014, which will lose royalty payments on U.S. sales of the rheumatoid arthritis drug Orencia from Bristol-Myers Squibb's (NYSE: BMY  ) this year. Investors may be worried about how the company's bottom line will be affected, especially considering the royalties contributed an estimated 25%-27% of total revenue in 2013. Should you panic and steer clear of Repligen or seize potential buying opportunities created by panicking investors? Let's use the latest guidance from management and some simple arithmetic to analyze how the bottom line will likely look for Repligen in 2014.

Estimating 2014 income
Similar to how we looked at top line estimations for Repligen in 2014, we'll take a big-picture approach to estimate what Orencia royalties meant to the bottom line.

Metric

2013 (Estimate)

2012

2011

Cost of Product Revenue

$24 million

$24.96 million

$5.58 million

Cost of Royalty and Other Revenue

$2.68 million

$2.21 million

$1.54 million

Total Operating Expenses

$46 million

$51.18 million

$27.67 million

Operating Income

$21 million

$11.08 million

($0.37 million)

Net Income

$16 million

$14.16 million

($0.04 million)

Sources: SEC filings, Piper Jaffray conference presentation, author's calculations.

Sticking with an estimated $48 million in product revenue for 2013 and assuming bioprocessing product gross profit margin of 50% -- below the 53.5% in Q3 2013 and 58% in Q2 -- we can calculate that cost of product revenue will be roughly $24 million. Similarly, we know that the University of Michigan receives 15% of all Orencia royalties collected by Repligen, which is recorded as a cost of royalty revenue. The estimates for total operating expenses, operating income, and net income are all actual figures from management guidance.

You've probably already figured out how much operating income will be lost with the Orencia royalty stream in 2014, which is simply total Orencia royalty revenue minus the amount paid to the University of Michigan, or about $15.2 million. The impact will hit hard because of the low costs associated with the revenue stream. Let's visualize the estimated affect on the 2014 bottom line with another table.

 Metric

2014 (Estimate)

2013 (Estimate)

% Change

Operating Income

$9.2 million-$11 million

$21 million

(47%-56%)

Operating Margin

18%-20%

13%-14%

31%-43%

Sources: Piper Jaffray conference presentation, author's calculations.

Of course, it's more difficult to estimate income than revenue for Repligen in 2014. While the company will lose revenue and income from Orencia royalties (arrow moving down), it continues to increase operational efficiency by lowering costs of product revenue, research and development, and administrative costs (arrow moving up). The latter will help offset the effects of the lost royalties, but how quickly can the company achieve its operational goals?

Consider the long-term efficiency goals of management as percentages of bioprocessing product revenues (total revenue for 2014) compared with expected 2013 totals.

Metric

2013 (Estimate)

Goal

Notes

Revenue

$48 million

10%-15% annual growth

Organic sales only; excludes acquisitions

Gross Margin

50%

55%

Improved capacity utilization, yield, product mix

R&D*

10%-11%, or ~$5 million

8%-10%

New products, extensions

Selling, General, and Administrative*

26%-27%, or ~$12.6 million

<25%

Decrease as product sales increase

Operating Margin*

13%-14%, or ~$6.5 million

20%-25%

 

*Percent of product revenue.
Source: Piper Jaffray conference presentation.

How realistic are these goals? Bioprocessing gross margin is already near 55%, so it doesn't seem unreasonable to expect research and development and administrative costs to be optimized to allow for an operating margin within the 20%-25% range. Consider that administrative expenses as a percent of product revenue have already fallen drastically from 2012 levels -- when they represented 32% of product revenue! Ditto for research and development expenses, which represented 25% of product revenue in 2012.

It's actually pretty simple: If bioprocessing gross margin hits 55% and research and development and administrative costs (as a percent of product sales) drop to 10% and 25%, respectively, then Repligen will achieve an operating margin of 20% in 2014. That would result in operating income in the range of $9.2 million-$11 million for this year.

Cash money and cash money flow
Investors can overlook the fact that a profitable company doesn't necessarily have to be cash flow-positive. Luckily, Repligen will continue to add to its substantial cash pile in 2014 with organic growth, albeit at a slower rate. Management expects cash on hand to fall in the range of $68 million-$70 million for the end of 2013, or about 17.5% of the company's market cap. As I discussed, continuing to improve operational efficiency in addition to growing product revenue will keep the company solidly cash flow-positive.

The big cash question for investors is, "Will management make a strategic acquisition in 2014?" All three product lines in the company's current portfolio have been boosted, at least in part, by a past acquisition. Although investors can expect management to pull the trigger if a growth opportunity emerges, I wouldn't factor an acquisition into your investment. Just keep a watchful eye on the situation.

Foolish bottom line
Metrics such as price-to-earnings and price-to-sales obviously depend on share price and, surprise!, predicting future share prices is not what us Fools spend our time worrying about. If enough Fools react in the comments section, then I'll consider writing a follow-up article evaluating share price-dependent metrics for various price points. For now, Repligen investors should be focusing on the long term picture of revenue growth, income stabilization, and management's sustainable use of the company's substantial cash position.

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