Any company that creates products and relies on other companies to use and distribute them will inevitably forge strong relationships with its customers. It's an important thing to look into when investing, yet easy to overlook. Investors should know whether customers are reliable, which are leaned on the most, and if the company they own is too dependent on any customer (or a select few). Bioprocessing product company Repligen (RGEN +0.33%) may make consumables that are the lifeline of the biotech industry, but its customer relationships are absolutely critical for smooth operations. Let's look at how the company interacts with the Life Sciences division of General Electric (GE 2.39%), EMD Millipore from Merck (MRK 0.31%), and Sigma-Aldrich (NASDAQ: SIAL) -- the three most important customers.
Source: Repligen Stephens Fall Investment Conference.
1. GE Healthcare, contracts through 2016 to 2021
Repligen's seven Protein A products dominate the market and continue to be the most important offering for the company. The affinity ligands are produced to selectively bind to monoclonal antibodies, making them the most important part of the purification process (which itself is the most important step in manufacturing). After producing the biologic drugs in a bioreactor, the fermentation broth is run through a series of chromatography columns packed with Protein A media, which captures the monoclonal antibodies and washes away everything else -- dead cells, media, and the like.
While Repligen is the world's largest producer of Protein A ligands, there's one tiny problem. The ligands must be attached to beads before being packed into chromatography columns -- and the company doesn't manufacture the beads. That's where GE Healthcare (and others) comes into play. When Repligen's Protein A ligands are fixed to special beads for chromatography, it creates the all-important Protein A media for purification. You can't have one without the other.
Approximately 60% of Repligen's total product revenue in 2013 will come from sales of Protein A ligands, with GE Healthcare contributing about 60% of that in addition to other product sales. Over the first nine months of the year, nearly 50%, or $18.5 million, of total product sales were derived from this very important customer. That's a significant percentage, but it's actually down from 62% for the same period in 2012.
2. Merck Millipore (EMD Millipore), contracts through 2016 to 2021
Where do the remaining 40% of Protein A sales come from? Other bead manufacturers, of course. Merck Millipore makes up approximately 30% of the remaining Protein A sales, while Life Technologies (now part of Thermo Fisher Scientific) makes up the bulk of the remaining 10%. The three companies distribute the final Protein A media to pharmaceutical companies manufacturing monoclonal antibodies for research, clinical, and commercial use.
3. Sigma-Aldrich, contract through 2021
Repligen's eight chromatography products (single-use columns and media for product purification) and four growth factor products will combine to make up the remaining 40%, or $19 million, of total product sales this year. While chromatography products are sold directly to pharmaceutical companies and contract manufacturers producing biologic drugs, Sigma-Aldrich is responsible for distributing growth factors to end users (Repligen co-promotes the products to eventual customers). What are growth factors? They're used during fermentation to increase product yield, which makes them another critical product for biomanufacturing applications.
Source: Repligen.
The most common growth factor used today is insulin, which commands 85%-90% of the market. However, the company's lead product, LONG R3 IGF-1, is more potent than insulin. That makes it easy to get excited about the potential to grow market share well north of 10%-15%, especially considering that the annual market opportunity for industrial cell culture applications around $50 million to $70 million. That makes Sigma-Aldrich an incredibly important partner for Repligen's growth plans.
Foolish bottom line
While it certainly appears the Repligen is overly reliant on just three customers, it's important to note a few things. First, there are only a handful of companies producing similar product -- and the high barrier to entry should keep the competition to a minimum. Second, the company is entered into long-term supply contracts with each customer. Third, the need for each of the company's products will only continue to grow for the foreseeable future, so it seems highly unlikely that distributors would end current contracts or not renew them once they expire.
This breakdown should give investors a better handle on Repligen's business. I'm not too concerned with overdependence on customers, and given the dynamics of the bioprocessing industry, I don't think it will become a problem. If the company expands its internal sales force in 2014 as management hinted during the last conference call, then it could sell more products directly to biotech companies and contract manufacturers that produce important biologic drugs. With monoclonal antibody sales growing at a 14% CAGR since 2009, Repligen should certainly be able to navigate its growth without stepping on any toes.
