The first full week of investing in 2014 is almost in the books. However, not all companies will face the same amount of uncertainty over the next 12 months. Bioprocessing products company Repligen (RGEN +0.75%), which supplies consumable products to pharmaceutical companies manufacturing monoclonal antibodies, will surely keep shareholders on the edge of their seats. What's contributing to the ambiguity for the growing life sciences company? A generous royalty stream on U.S. sales of the rheumatoid arthritis drug Orencia from Bristol-Myers Squibb's (BMY 0.31%) ended -- as initially agreed upon -- on the last day of 2013.
Despite the loss of Orencia royalties, management is still guiding for 10%-15% product revenue growth, gross product margin of 55%, and operating margin north of 15% this year. Nonetheless, the royalties made a substantial contribution to total revenue in 2013 -- an estimated 25%! That means investors will need to use caution when comparing financial metrics and numbers achieved this year to those from prior year periods. Rather than panic with the release of each quarterly update, let's use the latest guidance from management and some simple arithmetic to analyze how the top and bottom lines will likely look for Repligen in 2014. Today, we'll start with the top line.
Estimating 2014 revenue
The first step in understanding how revenue will change in a post-Orencia and Bristol-Myers Squibb world is visualizing how the royalty stream compared to product revenue and the percent of total revenue it represented.
|
2013(e) |
2012 |
2011 | |
|---|---|---|---|
|
Orencia Royalties |
$17.87 million |
$14.75 million |
$10.25 million |
|
Product Revenue |
$48 million |
$41.8 million |
$16.4 million |
|
Total Revenue |
$67 million |
$62.3 million |
$27.3 million |
|
Orencia % of Total Revenue |
27% |
24% |
38% |
Source: SEC filings, Piper Jaffray Conference Presentation, Author's calculations
Management has guided for $19-$21 million in total royalties and other revenue in 2013. Therefore, by subtracting the $1.124 million received from Pfizer in upfront and milestone payments for a spinal muscular atrophy licensing agreement and using the low end of guidance, we can assume that the remainder will be generated from Orencia royalties. The estimated royalty revenue in the table above would require Orencia to notch U.S. sales of roughly $943 million in 2013, or a growth rate of roughly 18% compared to the prior year.
Considering that (1) U.S. sales of Orencia through the first nine months of 2013 stood at $698 million, or about 20% higher than the same period in 2012, and (2) the tiered structure of the royalty agreement between the two companies, the royalty estimate is pretty solid barring any unforeseen developments. Better yet, Bristol-Myers Squibb has a history of reporting its full year results one full month ahead of Repligen (February vs. March), so investors will be able to accurately gauge the royalty stream for 2013 before management formally discusses results. When the investing world offers up life hacks, you have to take them.
Now we can turn our attention to 2014. How can investors expect the top line to look when it is completely dependent on product revenue?
|
2014(e) |
2013(e) |
% Change | |
|---|---|---|---|
|
Orencia Royalties |
$0 |
$17.87 million |
(100%) |
|
Product Revenue |
$51-$54 million |
$48 million |
10%-15% |
|
Total Revenue |
$51-$54 million |
$67 million |
(19%-24%) |
Source: Piper Jaffray Conference Presentation, Author's calculations
The table above highlights which categories are changing for Repligen in 2014. While product revenue will grow at a 10%-15% clip, the gains won't be obvious by observing the drop in total revenue -- derived completely from the loss of Orencia royalties. It's important to note that we cannot -- and should not -- factor in potential additional milestone payments from the Pfizer license agreement or a potential acquisition of a new product. If either occurs, consider it gravy. If they don't, hey, it's not a big deal.
We've made a reliable revenue estimate for 2014 based on the most current guidance from management and sales data from Bristol-Myers Squibb. That's all we can do with the top line for now, but we'll evaluate the bottom line (and cash) in the next article.
Foolish bottom line
Perspective is always a good thing in investing. For Repligen shareholders, it will be important to digest financial progress in terms of bioprocessing product sales growth and operational efficiency improvements (more in our next article). Yes, income and total revenue will deflate without Orencia royalties from Bristol-Myers Squibb, but that isn't going to affect the company's long term opportunities or the industry trends powering growth. Remember to check back later for a thorough analysis of Repligen's income and cash for 2014.
