Bioprocess products company Repligen (RGEN 3.76%) has an ambitious goal: growing product revenue by 10%-15% each year while achieving gross margins of 55%.
The company is set to lose an important royalty revenue stream in 2014 from Bristol-Myers Squibb, so organic growth (and perhaps an acquisition) will be necessary to continue creating shareholder value. Achieving such goals may sound impossible, but there are several equally impressive long term trends in the biopharmaceutical industry currently under way that will drive the company's growth. Still skeptical? Read this list of five important biotech trends and decide for yourself.
1. Growing worldwide monoclonal antibody pipeline
Monoclonal antibodies, or mABs, have become incredibly important biologic drugs for treating a range of autoimmune diseases and cancers in the last decade. There are more than 35 approved worldwide today, and 350 more in the industry's pipeline. In fact, they make up nearly half of all biologic drugs in development today.
Sales of mAB products have grown at a compound annual growth rate of 14% since 2009 to reach total global sales of $62 billion in 2012. While no one knows for sure how developmental treatments or generic biologics will add to future growth, approved therapies are expected to tack on an additional $22.5 billion in annual revenue by 2016.
Since Repligen creates the consumable bioprocessing products that pharmaceutical companies need to manufacture mABs, it's encouraging to see such a stable and entrenched long-term trend in growth.
2. Barriers to entry
Repligen isn't the only bioprocessing products company, nor is it the largest, but there are significant barriers to entry that protect its business (and that of its peers and competitors) from newcomers. First, the largest distributors in the industry are entered into long-term supply contracts with a select few important customers. For instance, Repligen has deals through 2021 with General Electric (GE 0.85%) subsidiary GE Healthcare and Merck's (MRK +0.59%) subsidiary Merck Millipore for Protein A ligands used in mAB purification. The company is also in a supply deal with Sigma-Aldrich for growth factor products, used to increase production of mABs during fermentation, that also runs through 2021.
Second, while there is always room for innovation, pharmaceutical companies are largely bound by the stickiness of current consumable products. Once a biomanufacturing process is in place and approved by the Food and Drug Administration, the risks and costs associated with changing it often outweigh the incremental benefits achieved by introducing new technologies. Couple that with the long-term supply agreements in place between consumables companies and distributors and it becomes clear most of the innovation will occur within the industry. That goes against everything my inner entrepreneur believes, but it is incredibly difficult for newcomers to break into the market.
3. Concentrated market reduces selling costs
There aren't many companies doing what Repligen does, nor are there many end-users outside of the pharmaceutical industry. That isn't meant to downplay the need for its products. Instead, it underscores the well-defined customer channels in place that reduce costs and help support high margins. Industrial bioprocess companies such as Solazyme and Amyris, spurred by the exploding synthetic biology movement, will seek out tools and products to increase the efficiency of their upstream and downstream processes for creating renewable chemicals and products, but most don't need the same consumables required in mAB production. External innovation is much more likely for those industries -- and is already occurring today.
4. No risk of regulatory or clinical uncertainty
Investors must always price in the risk of failure from clinical trials or the possibility that the FDA and its advisory committees don't see the same signal in clinical data noise. Potential tends to outweigh the risk factor when valuing companies until risks rear their ugly head, but that's another story. Luckily, Repligen is free of such distractions as a commercially focused company with more stable growth prospects and profitability.
5. Plenty of room to improve market share
The current bioprocess consumables market exceeds $3 billion annually. Repligen is relatively small compared to its peers, and is quite far away from reaching even $100 million in annual product sales. However, it stacks up well in the areas it competes in. Already the world's leading producer of Protein A ligand, Repligen has a long runway for growing market share with its two other offerings, growth factors, and OPUS chromatography columns, which will collectively account for about 40% of product sales in 2013, or about $19 million.
The company estimates that the opportunity for industrial cell culture consumables such as growth factors sits in the range of $50-$70 million per year. Despite the fact that LONG R3 IGF-1, the company's primary growth factor product, is more potent than insulin, the current standard, it has a lowly 10%-15% market share. That represents a great growth opportunity for Repligen and Sigma-Aldrich, although such growth is more important for the smaller company.
Similarly, the company estimates that the opportunity for its OPUS chromatography columns -- used in clinical stage manufacturing of biologic drugs -- sits at roughly $100 million per year. OPUS comes with the advantage of allowing biomanufacturing facilities to choose the media packed into the columns, whereas other suppliers may require customers to use stock media. Repligen will debut its first-to-market 45 centimeter diameter columns in early 2014, columns that have more than twice the capacity of the currently available 30 centimeter diameter columns.
Finally, a recent 9,000-square-foot manufacturing expansion and the potential for up to 17,000 square feet more down the road should allow Repligen to not only grow alongside the biotech industry, but increase its market share in key areas, too.
Foolish bottom line
One of the trademarks of a good investment that my Foolish colleague Jason Moser constantly preaches is to identify a company with a short-term catalyst and/or favorable long-term trends. The market for monoclonal antibodies is growing at an impressive clip now and could grow even faster in the future, while Repligen is among the leading producers of key bioprocessing products needed to manufacture such drugs. It is profitable, growing, and has $70 million in cash to strike a strategic acquisition if necessary. There certainly appears to be more long term upside than downside to me.
