Drug pipelines are so overrated. Over the last decade, Repligen (NASDAQ:RGEN) has quietly crushed its niche of selling the equipment needed to safely and efficiently manufacture biologic drugs. That much is evident from the stock's 10-year return of 1,680%, and the latest operating results for the second quarter of 2019.

The business reported record quarterly revenue, which is nothing new considering the pace of sales growth. Repligen delivered year-over-year revenue growth of 48% in Q2 and more than doubled operating income in the first half of 2019, compared with the year-ago period. That gave management the confidence to once again raise full-year 2019 guidance for revenue, although it will come at the expense of slightly lower earnings as an important acquisition is integrated. Here's what investors need to know about the latest operating results.

A lab-scale bioreactor being sampled by a scientist.

The latest acquisition could make sampling larger bioreactors a breeze, unlike this scientist's experience. Image source: Getty Images.

By the numbers

Repligen continues to capitalize on its leadership position in bioprocess engineering. The company sells a range of equipment used to purify and manufacture biologic drugs in volumes suitable for early-stage clinical trials, all the way up to blockbuster commercial franchises. It sells single-use chromatography columns used to purify monoclonal antibodies after production, filtration products for removing cell debris and biologic drugs from fermenter broth, and protein products that comprise the resin (read: the active part) of third-party chromatography products.

The rising tide of biopharma clinical trials and drug launches globally has created quite the tailwind for the business. There are 13 monoclonal antibody drugs on the market in the U.S., with 40% of those having launched since 2016, and more than 400 monoclonal antibody drugs in clinical trials. The trend certainly shows up on the income statement.

The company grew revenue 42% in the first half of 2019 compared with the year-ago period, which was far faster than the total increase in costs and expenses in that span. That's doubly impressive considering it made multiple acquisitions in that time, and acquisitions can be expensive to integrate. 

Metric

First Half 2019

First Half 2018

Change 

Revenue

$131 million

$92.5 million

42%

Total costs and expenses

$109 million

$82.3 million

32%

Operating income

$22.2 million

$10.2 million

117%

Net income

$16.1 million

$6.2 million

161%

Diluted earnings per share (EPS)

$0.34

$0.14

143%

Data source: Repligen. 

Then again, the entire business has been built on acquiring promising product platforms and taking them to new heights, so management has plenty of experience gobbling up assets from competitors. The latest was the $240 million acquisition of C Technologies, a developer of fiber optic technologies used to create light-detecting sensors for various industries. Repligen is interested in the bioprocess analytics application of the tools, likely to be related to the more accurate, nondestructive measurement of cell and product concentrations. 

It paid for the acquisition by raising $600 million through a combination of stock and debt offerings, although the bulk of the funds were raised subsequent to the end of Q2. It reported a cash balance of $209 million at the end of June. The company used the proceeds to finance the acquisition and pay the next maturing debt notes on its books, but added $290 million in cash to the balance sheet when the dust settled. That leaves it very well positioned to invest in growth, with the flexibility to make another acquisition should the opportunity arise.

A potted plant growing in the shape of an arrow pointing up.

Image source: Getty Images.

Looking ahead

After gaining more clarity on the financial effects of the C Technologies acquisition post-closing, management decided to change its full-year 2019 guidance as follows:

  • Total revenue is expected to be $266 million at the midpoint, up from a previous midpoint of $238.5 million. The new guidance marks 37% growth from last year.
  • Gross margin is forecast for 55.5% at the midpoint, down from a previous midpoint of 56.5%.
  • Operating income is expected to be $34 million at the midpoint, down from a previous expectation for $40.5 million. The decrease is due to acquisition-related costs. 
  • The outlook for net income is $18 million at the midpoint, down from a previous midpoint of $26 million. The decrease is due to a higher-than-anticipated tax rate for the year.
  • Diluted EPS is expected to be $0.36 at the midpoint, down from a previous expectation of $0.53, due to a higher tax rate and dilution related to the C Technologies acquisition.

Investors can check the press release for more details about full-year 2019 guidance on a non-GAAP basis (all adjusted earnings metrics are expected to increase compared with previous expectations since acquisition costs are excluded). But sticking to GAAP numbers tends to be the safer approach.

The newest guidance suggests the business will incur significant expenses in the second half of 2019 to integrate its latest acquisition. That shouldn't be too alarming if the pace of growth continues -- and there are currently no signs it will slow.