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REPLIGEN CORP - Quarter Report: 2004 December (Form 10-Q)

For the quarterly period ended December 31, 2004
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December 31, 2004

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             

 

Commission File Number 0-14656

 


 

REPLIGEN CORPORATION

(exact name of registrant as specified in its charter)

 


 

Delaware   04-2729386

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

41 Seyon Street, Bldg. 1, Suite 100

Waltham, MA

  02453
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code: (781) 250-0111

 

 

(Former name, former address and former fiscal year, if changed since last report.)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of February 8, 2005.

 

Common Stock, par value $.01 per share

  30,074,435
Class   Number of Shares

 



Table of Contents

REPLIGEN CORPORATION

INDEX

 

         PAGE

    PART I. FINANCIAL INFORMATION     
Item 1.  

Financial Statements (Unaudited) Balance Sheets as of December 31, 2004 and March 31, 2004

   3
   

Statements of Operations for the Three Months and Nine Months Ended December 31, 2004 and 2003

   4
   

Statements of Cash Flows for the Nine Months Ended December 31, 2004 and 2003

   5
   

Notes to Financial Statements

   6
Item 2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   10
Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

   14
Item 4.  

Controls and Procedures

   15
    PART II. OTHER INFORMATION     
Item 1.  

Legal Proceedings

   15
Item 2.  

Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

    None

    
Item 3.  

Defaults Upon Senior Securities

    None

    
Item 4.  

Submission of Matters to a Vote of Security Holders

    None

    
Item 5.  

Other Information

    None

    
Item 6.  

Exhibits

   15
Signature    16

Exhibit Index

   17

 

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

REPLIGEN CORPORATION

BALANCE SHEETS

UNAUDITED

 

     December 31, 2004

    March 31, 2004

 

ASSETS

                

Current assets:

                

Cash and cash equivalents

   $ 3,323,854     $ 3,958,677  

Marketable securities

     14,810,975       9,996,070  

Accounts receivable, less reserve of $35,000

     611,571       972,249  

Inventories

     689,140       879,381  

Prepaid expenses and other current assets

     345,554       328,229  
    


 


Total current assets

     19,781,094       16,134,606  

Property, plant and equipment, at cost:

                

Leasehold improvements

     2,311,841       2,311,982  

Equipment

     1,254,206       1,356,915  

Furniture and fixtures

     198,961       200,339  
    


 


       3,765,008       3,869,236  

Less: accumulated depreciation and amortization

     (1,829,914 )     (1,689,625 )
    


 


Total net fixed assets

     1,935,094       2,179,611  

Long-term marketable securities

     5,496,991       10,708,133  

Restricted cash

     200,000       200,000  

Other assets, net

     —         392,520  
    


 


Total assets

   $ 27,413,179     $ 29,614,870  
    


 


LIABILITIES AND STOCKHOLDERS’ EQUITY

                

Current liabilities:

                

Accounts payable

   $ 509,058     $ 714,291  

Accrued expenses

     2,121,435       1,736,576  
    


 


Total current liabilities

     2,630,493       2,450,867  

Long term liabilities

     92,979       —    

Commitments and contingencies

                

Stockholders’ equity:

                

Preferred stock, $0.01 par value, 5,000,000 shares authorized, no shares issued or outstanding

     —         —    

Common stock, $0.01 par value, 40,000,000 shares authorized, 30,074,435 and 30,036,085 shares issued and outstanding at December 31, 2004 and March 31, 2004, respectively

     300,744       300,361  

Additional paid-in capital

     181,454,845       181,394,602  

Deferred compensation

     (1,582 )     (23,603 )

Accumulated deficit

     (157,064,300 )     (154,507,357 )
    


 


Total stockholders’ equity

     24,689,707       27,164,003  

Total liabilities and stockholders’ equity

   $ 27,413,179     $ 29,614,870  
    


 


 

See accompanying notes.

 

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REPLIGEN CORPORATION

STATEMENTS OF OPERATIONS

 

     Three months ended December 31,

    Nine months ended December 31,

 
     2004

    2003

    2004

    2003

 

Revenue

                                

Product revenue

   $ 2,259,763     $ 1,303,864     $ 6,365,649     $ 4,729,787  

Research revenue

     —         16,982       —         70,975  
    


 


 


 


Total revenue

     2,259,763       1,320,846       6,365,649       4,800,762  

Cost of revenue

     1,028,615       782,233       2,864,537       2,378,293  
    


 


 


 


Gross profit

     1,231,148       538,613       3,501,112       2,422,469  

Operating expenses:

                                

Research and development

     1,039,812       1,850,476       3,703,122       5,180,540  

Selling, general and administrative

     1,241,890       915,764       3,410,224       3,829,558  
    


 


 


 


Total operating expenses

     2,281,702       2,766,240       7,113,346       9,010,098  

Loss from operations

     (1,050,554 )     (2,227,627 )     (3,612,234 )     (6,587,629 )

Interest income

     107,325       100,721       305,291       292,725  

Other income

     750,000       —         750,000       —    
    


 


 


 


Net loss

   $ (193,229 )   $ (2,126,906 )   $ (2,556,943 )   $ (6,294,904 )
    


 


 


 


Basic and diluted net loss per share

   $ (0.01 )   $ (.07 )   $ (0.09 )   $ (0.21 )
    


 


 


 


Basic and diluted weighted average common shares outstanding

     30,064,836       29,878,190       30,055,838       29,575,121  
    


 


 


 


 

See accompanying notes.

 

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REPLIGEN CORPORATION

STATEMENTS OF CASH FLOWS

 

     Nine Months Ended December 31,

 
     2004

    2003

 

Cash flows from operating activities:

                

Net loss

   $ (2,556,943 )   $ (6,294,904 )

Adjustment to reconcile net loss to net cash used in operating activities:

                

Issuance of common stock warrants for payment for services

     —         52,300  

Stock based compensation expense

     77,146       56,365  

Depreciation and amortization

     661,438       677,056  

Changes in assets and liabilities:

                

Accounts receivable

     360,678       117,679  

Inventories

     190,241       (123,897 )

Prepaid expenses and other current assets

     (17,325 )     53,242  

Accounts payable

     (205,233 )     (232,974 )

Accrued expenses

     384,859       618,732  

Long term liabilities

     92,979       —    
    


 


Net cash used in operating activities

     (1,012,160 )     (5,076,401 )
    


 


Cash flows from investing activities:

                

Purchases of marketable securities

     (12,308,387 )     (20,460,151 )

Redemptions of marketable securities

     12,704,624       9,971,446  

Purchases of property, plant and equipment

     (24,401 )     (152,147 )
    


 


Net cash provided by (used in) investing activities

     371,836       (10,640,852 )
    


 


Cash flows from financing activities:

                

Exercise of stock options

     5,501       154,032  

Proceeds from issuance of common stock and warrants, net of issuance cost

     —         11,825,035  
    


 


Net cash provided by financing activities

     5,501       11,979,067  
    


 


Net decrease in cash and cash equivalents

     (634,823 )     (3,738,186 )

Cash and cash equivalents, beginning of period

     3,958,677       6,108,004  
    


 


Cash and cash equivalents, end of period

   $ 3,323,854     $ 2,369,818  
    


 


Supplemental disclosure of non cash activities:

                

Non cash purchases of PP&E

   $ —       $ 178,173  
    


 


Disposal of fixed assets no longer in service

   $ 128,629     $ —    
    


 


 

See accompanying notes.

 

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REPLIGEN CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

 

1. Basis of Presentation

 

The financial statements included herein have been prepared by Repligen Corporation (the “Company”, “Repligen” or “we”), in accordance with accounting principles generally accepted in the United States and pursuant to the rules and regulations of the Securities and Exchange Commission for quarterly reports on Form 10-Q and Article 10 of Regulation S-X and do not include all of the information and footnote disclosures required by accounting principles generally accepted in the United States. These financial statements should be read in conjunction with the audited financial statements and accompanying notes thereto included in our Form 10-K for the year ended March 31, 2004.

 

In the opinion of management, the accompanying unaudited financial statements include all adjustments, consisting of only normal, recurring adjustments, necessary for a fair presentation of the financial position, results of operations and cash flows. The results of operations for the interim periods presented are not necessarily indicative of results to be expected for the entire year.

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Certain reclassifications of prior period data have been made to conform to the current reporting period.

 

2. Revenue Recognition

 

We apply Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition” to our revenue arrangements. We generate product revenues from the sale of our Protein A products to customers in the pharmaceutical and process chromatography industries and from the sale of SecreFlo to hospital-based gastroenterologists. In accordance with SAB No. 104, we recognize revenue related to product sales upon delivery of the product to the customer as long as there is persuasive evidence of an arrangement, the fee is fixed or determinable and collection of any related receivable is probable.

 

Additionally, during the fiscal year ended March 31, 2004, the Company generated non-product revenues from sponsored research and development projects under a Small Business Innovation Research (“SBIR”) Phase I grant. Research revenue is recognized as earned under cost plus fixed-fee contracts, or on a straight-line basis over the term of contract, which approximates when work is performed and costs are incurred. Research expenses in the accompanying statements of operations include funded and unfunded expenses.

 

3. Net Loss Per Share

 

We apply Statement of Financial Accounting Standard (“SFAS”) No. 128 presenting earnings per share. Basic net loss per share represents net loss divided by the weighted average number of common shares outstanding during the period. The dilutive effect of potential common shares, consisting of outstanding stock options and warrants, is determined using the treasury stock method in accordance with SFAS No. 128. Diluted weighted average shares outstanding for the periods presented in the accompanying financial statements do not include the potential common shares from warrants and stock options because to do so would have been antidilutive for the periods presented as the additional common shares from warrants and stock options would lower our diluted net loss per share. Accordingly, basic and diluted net loss per share is the same for all periods presented. At December 31, 2004, there were outstanding options to purchase 2,199,400 shares of our common stock at a weighted average exercise price of $3.00 per share and outstanding warrants to purchase 154,946 shares of our common stock at a weighted average exercise price of $8.82 per share not included in the calculation of earnings per share because to do so would have been antidilutive. At December 31, 2003, there were outstanding options to purchase 2,128,800 shares of the Company’s common stock at a weighted average exercise price of $3.06 per share and warrants to purchase 379,946 shares of the Company’s common stock at a weighted average exercise price of $4.84 per share not included in the calculation of earnings per share because to do so would have been antidilutive.

 

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4. Stock Based Compensation

 

We account for stock-based compensation under SFAS No. 123 “Accounting for Stock-Based Compensation.” We continue to apply APB No. 25 for employee stock option awards and elected the disclosure-only alternative for the same under SFAS No. 123. We have computed the pro forma disclosures required under SFAS Nos. 123 and 148 for all stock options granted to employees using the Black-Scholes option-pricing model prescribed by SFAS No. 123.

 

If compensation expense for our stock option plan had been determined in a manner consistent with SFAS No. 123, the pro forma net loss and net loss per share would have been as follows:

 

    

Three months ended
December 31,

2004


   

Three months ended
December 31,

2003


   

Nine months ended
December 31,

2004


   

Nine months ended

December 31,

2003


 

Net Loss as reported

   $ (193,229 )   $ (2,126,906 )   $ (2,556,943 )   $ (6,294,904 )

Add: Stock-based employee compensation expense included in reported net loss

     —         21,990       63,167       56,365  

Deduct: Stock-based employee compensation expense determined under fair value based method for all employee awards

     (189,981 )     (307,838 )     (800,227 )     (711,244 )

Pro forma net loss

   $ (383,210 )   $ (2,412,754 )   $ (3,294,003 )   $ (6,949,783 )
    


 


 


 


Basic and diluted net loss per share:

                                

As reported

   $ (.01 )   $ (.07 )   $ (.09 )   $ (.21 )

Pro forma

   $ (.01 )   $ (.08 )   $ (.11 )   $ (.23 )

 

5. Cash, Cash Equivalents and Marketable Securities

 

We apply SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” At December 31, 2004, all of our marketable securities are classified as held-to-maturity investments as we have the positive intent and ability to hold to maturity. As a result, these investments are recorded at amortized cost. Marketable securities are investments with original maturities of greater than 90 days. Long-term marketable securities are investment grade securities with maturities of greater than one year.

 

Cash and marketable securities consist of the following:

 

    

December 31,

2004


  

March 31,

2004


Cash

   $ 3,323,854    $ 3,958,677
    

  

Marketable securities

             

Corporate and other debt securities

   $ 10,283,160    $ 8,473,699

U.S. Government and agency securities

     4,527,815      1,522,371
    

  

(Average remaining maturity, 5 months at December 31, 2004)

   $ 14,810,975    $ 9,996,070
    

  

Long-term marketable securities

             

Corporate and other debt securities

   $ 996,991    $ 7,147,601

U.S. Government and agency securities

     4,500,000      3,560,532
    

  

(Average remaining maturity, 17 months at December 31, 2004).

   $ 5,496,991    $ 10,708,133
    

  

 

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Restricted cash of $200,000 is related to our facility lease obligation.

 

6. Inventories

 

Inventories are stated at the lower of cost (first-in, first-out) or market. Work-in-process and finished goods inventories consist of material, labor, outside processing costs and manufacturing overhead. Inventories at December 31, 2004 and March 31, 2004 consist of the following:

 

    

December 31,

2004


  

March 31,

2004


Raw materials

   $ 156,765    $ 85,334

Work-in-process

     206,258      213,752

Finished goods

     326,117      580,295
    

  

Total

   $ 689,140    $ 879,381
    

  

 

7. Accrued Expenses

 

Accrued expenses consist of the following:

 

    

December 31,

2004


  

March 31,

2004


Research & development costs

   $ 471,563    $ 625,720

Payroll & payroll related costs

     306,749      419,318

Professional and consulting costs

     331,452      67,334

Royalty expenses

     928,512      366,856

Other accrued expenses

     77,287      181,350

Unearned revenue

     5,872      75,998
    

  

     $ 2,121,435    $ 1,736,576
    

  

 

8. Comprehensive Income

 

We apply SFAS No. 130, “Reporting Comprehensive Income.” SFAS No. 130 requires disclosure of all components of comprehensive income on an annual and interim basis. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. Our comprehensive loss is equal to our reported net loss for all periods presented.

 

9. Segment Reporting

 

We apply SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” SFAS No. 131 establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. SFAS No. 131 also establishes standards for related disclosures about products and services and geographic areas. The chief operating decision maker, or decision-making group, in making decisions how to allocate resources and assess performance, identifies operating segments as components of an enterprise about which separate discrete financial information is available for evaluation. To date, we view our operations and manage our business as one operating segment. As a result, the financial information disclosed herein represents all of the material financial information related to our principal operating segment.

 

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The following table represents percentage of total revenue classified by geographic area:

 

    

Three months ended

December 31,


   

Nine months ended

December 31,


 
     2004

    2003

    2004

    2003

 

US

   31 %   43 %   42 %   55 %

Europe

   68 %   57 %   57 %   43 %

Other

   1 %   0 %   1 %   2 %
    

 

 

 

Total

   100 %   100 %   100 %   100 %

 

During the three months ended December 31, 2004 there were two customers who accounted for approximately 66% and 16% of revenues, respectively. During the three months ended December 31, 2003, there were two customers who accounted for approximately 55% and 13% of revenues, respectively. During the nine months ended December 31, 2004 there were two customers who accounted for approximately 54% and 17% of revenues, respectively. During the nine months ended December 31, 2003, there were two customers who accounted for approximately 37% and 13% of revenues, respectively. At December 31, 2004, two customers accounted for 40% and 24% of our accounts receivable. At March 31, 2004, one customer accounted for 59% of accounts receivable.

 

10. New Accounting Pronouncements

 

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation.” Statement 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and amends FASB Statement No. 95, “Statement of Cash Flows.” Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.

 

Statement 123(R) shall be effective for the Company as of the first interim reporting period that begins after June 15, 2005. Early adoption will be permitted in periods in which financial statements have not yet been issued. We expect to adopt Statement 123(R) for the quarter ended September 30, 2005.

 

Statement 123(R) permits public companies to adopt its requirements using one of two methods:

 

1. A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of Statement 123 for all awards granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date.

 

2. A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under Statement 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

 

At this time, management has not made a decision as to the method it may select.

 

As permitted by Statement 123, the company currently accounts for share-based payments to employees using Opinion 25’s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of Statement 123(R)’s fair value method will have a significant impact on our result of operations, although it will have no impact on our overall financial position. The impact of adoption of Statement 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of Statement 123 as described in the disclosure of pro forma net income and earnings per share in Note 4 to our consolidated financial statements.

 

In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151 (“SFAS No. 151”), Inventory Costs, an amendment of APB No. 43, Chapter 4. The amendments made by SFAS No. 151 will improve financial reporting by requiring that abnormal amounts of idle facility expense, freight, handling costs, and

 

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wasted materials (spoilage) be recognized as current-period charges and by requiring the allocation of fixed production overheads to inventory based on the normal capacity of production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning after November 24, 2004. The Company is currently evaluating the impact that adoption of SFAS No. 151 will have on its financial position and results of operations.

 

11. Other Income

 

Other income for the nine-month period ended December 31, 2004 consists of $750,000 in proceeds from a legal settlement received in November 2004 (for further information, see Legal Proceedings.)

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview

 

We are developing novel biological products for profound neuropsychiatric disorders and autoimmune diseases. Our therapeutic product candidates are secretin for schizophrenia and anxiety disorders, uridine for bipolar disorder and CTLA4-Ig and Protein A for autoimmune diseases. Each of these products represents a novel approach to therapy which may provide better outcomes for patients than existing drugs.

 

Our business strategy is to maintain full commercial rights to our product candidates through “proof of principle” clinical studies after which we may seek corporate partners for further development and marketing. We partially fund the development of our proprietary therapeutic product candidates with the profits derived from the sales of our specialty pharmaceutical products. This will enable us to independently advance our product candidates while at the same time minimize our use of cash and operating losses.

 

We are subject to a number of risks typically associated with similar companies in the biotechnology industry. Principally those risks are associated with our dependence on collaborative arrangements, development by us or our competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, results of clinical trials, compliance with the U.S. Food and Drug Administration and other governmental regulations and approval requirements, as well as the ability to grow our business and to obtain adequate funding to fund this growth, as well as other potential risk factors included in the filings made by us from time to time with the SEC, including under the section entitled “Certain Factors That May Affect Future Results” in our Annual Report on Form 10-K for the year ended March 31, 2004.

 

Critical Accounting Policies and Estimates

 

The SEC requires that reporting companies discuss their most “critical accounting policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations. The SEC indicated that a “critical accounting policy” is one that is important to the portrayal of a company’s financial condition and operating results and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

 

We have identified the policies and estimates below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations is discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see the Notes to Financial Statements of this report.

 

Revenue Recognition

 

We apply Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB No. 104”) to our revenue arrangements. We generate product revenues from the sale of our Protein A products to customers in the pharmaceutical and process chromatography industries, and from the sale of SecreFlo to hospital-based

 

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gastroenterologists. In accordance with SAB No. 104, we recognize revenue related to product sales upon delivery of the product to the customer as long as there is persuasive evidence of a sale, the price is fixed or determinable and collection of the related receivable is probable.

 

Additionally, during the fiscal year ended March 31, 2004 we generated non-product revenues from sponsored research and development projects under a Small Business Innovation Research (“SBIR”) Phase I grant. Research revenue is recognized as earned under cost plus fixed-fee contracts, or on a straight-line basis over the term of contract, which approximates when work is performed and costs are incurred. Research expenses in the accompanying statements of operations include funded and unfunded expenses.

 

Use of Estimates

 

We prepare our financial statements in accordance with accounting principles generally accepted in the United States. These principles require that we make estimates and use assumptions that affect the reporting of our assets and our liabilities as well as the disclosures that we make regarding assets and liabilities and income and expense that are contingent upon uncertain factors as of the reporting date. The actual payments, and thus our actual results, could differ from our estimates.

 

Inventory

 

We value inventory at cost or, if lower, fair market value. We determine cost using the first-in, first-out method. We regularly review our inventories and record a provision for excess and obsolete inventory based on certain factors that may impact the realizable value of our inventory. Factors we consider include expected sales volume, production capacity and expiration dates. We write down inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable value and inventory in excess of expected requirements, to cost of goods sold.

 

Results of Operations

 

Three months ended December 31, 2004 vs. December 31, 2003

 

Total revenue

 

Total revenue for the three-month periods ended December 31, 2004 and December 31, 2003, was approximately $2,260,000 and $1,321,000 respectively, an increase of $939,000 or 71%. During the three-month period ended December 31, 2004 Protein A sales increased to $1,725,000 from $845,000 during the same period in the prior fiscal year. Our revenues are subject to significant quarterly fluctuations based on the timing of large-scale production orders of Protein A.

 

Cost of revenue

 

Cost of revenue for the three-month periods ended December 31, 2004 and December 31, 2003, was approximately $1,029,000 and $782,000, respectively, an increase of $247,000 or 32%. Gross profit for the three-month periods ended December 31, 2004 and 2003 was $1,231,000 or 54% of total revenue and $539,000 or 41% of total revenue, respectively. This increase in costs of revenue is directly attributable to higher sales of Protein A and the Company increasing its provision for excess and expired inventory of approximately $145,000 based on a review of inventory levels on hand. Gross profitability is positively impacted in periods when product sales are higher because there is more dilution of fixed costs.

 

Operating expenses

 

Total operating expenses for the three-month periods ended December 31, 2004 and December 31, 2003, were approximately $2,282,000 and $2,766,000, respectively, a decrease of $484,000 or 17%.

 

Research and development expenses for the three-month periods ended December 31, 2004 and December 31, 2003, were approximately $1,040,000 and $1,850,000, respectively, a decrease of $810,000 or 44%. Significant fluctuations in research and development expenses may occur from period to period depending on the nature, timing, and extent of development activities over any given time period. During the three-month period ended December 31, 2004, this decrease is largely attributable to a decrease in clinical trial expenses of $596,000 and clinical material expenses of $174,000.

 

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Selling, general and administrative expenses for the three-month periods ended December 31, 2004 and December 31, 2003, were approximately $1,242,000 and $916,000 respectively, an increase of $326,000 or 36%. This increase is largely attributable to increased litigation expenses of $390,000 offset by a decrease in other professional expenses of $104,000 during the three-month period ended December 31, 2004.

 

Interest income

 

Interest income for the three-month periods ended December 31, 2004 and December 31, 2003 was approximately $107,000 and $101,000 respectively.

 

Other income

 

Other income for the quarter ended December 31, 2004 consists of $750,000 in proceeds from a legal settlement received in November 2004 (for further information, see Legal Proceedings.)

 

Nine months ended December 31, 2004 vs. December 31, 2003

 

Total revenue

 

Total revenue for the nine-month periods ended December 31, 2004 and December 31, 2003, was approximately $6,366,000 and $4,801,000 respectively, an increase of $1,565,000 or 33%. During the nine-month period ended December 31, 2004 Protein A sales increased to $4,746,000 from $3,366,000 during the same period in the prior fiscal year. This increase in total revenue is attributable to increased demand for our Protein A and Secreflo products during the nine-month period ended December 31, 2004. Our revenues are subject to quarterly fluctuations, based on the timing of large-scale production orders of Protein A.

 

Cost of revenue

 

Cost of revenue for the nine-month periods ended December 31, 2004 and December 31, 2003, was approximately $2,865,000 and $2,378,000, respectively, an increase of $487,000 or 20%. Gross profit for the nine-month periods ended December 31, 2004 and 2003 was $3,501,000 or 55% of total revenue and $2,423,000 or 50% of total revenue, respectively. This increase in costs and increase in gross profit is due primarily to increased sales and changes in product mix for our Protein A products. Gross profitability benefited from the dilution of fixed costs with increased sales.

 

Operating expenses

 

Total operating expenses for the nine-month periods ended December 31, 2004 and December 31, 2003, were approximately $7,113,000 and $9,010,000, respectively, a decrease of $1,897,000 or 21%.

 

Research and development expenses for the nine-month periods ended December 31, 2004 and December 31, 2003, were approximately $3,703,000 and $5,180,000, respectively, a decrease of $1,477,000 or 29%. Significant fluctuations in research and development expenses may occur from period to period depending on the nature, timing, and extent of development activities over any given time frame. This decrease is largely attributable to a decrease in clinical material of $378,000, contract research of $102,000 and trial expenses of $767,000, as well as personnel costs of $148,000 during the nine-month period ended December 31, 2004.

 

Selling, general and administrative expenses for the nine-month periods ended December 31, 2004 and December 31, 2003, were approximately $3,410,000 and $3,830,000 respectively, a decrease of $420,000 or 11%. This decrease is largely attributable to one time marketing expenses of $180,000 for our SecreFlo product that were incurred in fiscal year 2004 that were not repeated in fiscal year 2005 as well as decreased professional expenses of $320,000 in fiscal year 2005.

 

Interest income

 

Interest income for the nine-month periods ended December 31, 2004 and September 30, 2003, was approximately $305,000 and $293,000, respectively.

 

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Other Income

 

Other income for the nine-month period ended December 31, 2004 consists of $750,000 in proceeds from a legal settlement received in November 2004 (for further information, see Legal Proceedings.)

 

Liquidity and capital resources

 

We have financed our operations primarily through sales of equity securities and revenues derived from product sales and government grants. Our revenue for the foreseeable future will be limited to our product revenue related to Protein A and SecreFlo. Given the uncertainties related to pharmaceutical product development, we are currently unable to reliably estimate when, if ever, our therapeutic product candidates will generate revenue and cash flows. Total cash and marketable securities at December 31, 2004 totaled $23,832,000, a decrease of $1,031,000 from $24,863,000 at March 31, 2004.

 

Our operating activities used approximately $1,012,000 of cash for the nine-month period ended December 31, 2004, with cash uses consisting of a net loss from operations of approximately $2,557,000, which benefited from a one-time payment of $750,000 for a legal settlement, a decrease in accounts payable of $205,000 and an increase in prepaid expenses of $17,000. These uses of cash were offset by non-cash charges of approximately $661,000 for depreciation and amortization, $77,000 for stock based compensation expense, as well as a decrease in accounts receivable of $361,000, a decrease in inventories of $190,000, an increase in long term liabilities of $93,000 and accrued expenses of $385,000.

 

Our cash was reduced by capital expenditures of $24,000 for the nine-month period ended December 31, 2004. Our investing activities provided cash of approximately $372,000 primarily from redemptions of marketable securities. We do not currently use derivative financial instruments. We generally place our marketable security investments in high quality credit instruments, as specified in our investment policy guidelines. Our investment policy also limits the amount of credit exposure to any one issue, issuer (with the exception of U.S. treasury obligations) and type of investment. We do not expect any material loss from our investment in marketable securities.

 

Working capital increased to $17,151,000 at December 31, 2004 from $13,684,000 at March 31, 2004 primarily as a result of the redemption of long-term marketable securities and the purchase of short-term marketable securities.

 

We rely on a single supplier, ChiRhoClin, Inc., for our SecreFlo product. In February 2004, we terminated our Licensing Agreement with ChiRhoClin for breach. We believe we have the right, in accordance with the terms of the Licensing Agreement, to recover certain payments made to ChiRhoClin, totaling approximately $5 million, from ChiRhoClin’s share of royalties on sales of SecreFlo and that ChiRhoClin is obligated to continue to supply SecreFlo and that we retain the right to sell SecreFlo until such payments have been recovered. ChiRhoClin has filed a counterclaim alleging that Repligen has wrongfully terminated the Licensing Agreement. In its counterclaim, ChiRhoClin seeks to recover $1,750,000 in additional milestones payments, withheld royalty payments and future royalty payments. Accrued expenses as of December 31, 2004 include approximately $929,000 for these royalty payments. The milestone payments of $1,750,000 are not included as accrued expenses. (Please see the Legal Proceedings section of our previously filed periodic reports on Form 10-Q and/or Form 10K for further information.)

 

We plan to continue to invest in key research and development activities. We expect to continue to incur operating losses for the foreseeable future. Our future capital requirements include, but are not limited to, continued investment in our research and development programs, capital expenditures primarily associated with purchases of equipment and continued investment in our intellectual property estate. While we are generally able to forecast our overall spending, we are unable to predict with certainty costs associated with our existing legal proceedings.

 

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Commitments

 

As of December 31, 2004 we had the following fixed obligations and commitments:

 

     Payments Due By Period

     Total

   Less than
1 Year


   2 – 3
Years


   4 – 5
Years


   More than 5
Years


     (In thousands)

Operating lease obligations

   $ 2,874    $ 391    $ 795    $ 939    $ 749

Purchase obligations

     169      101      68      —        —  

Contractual obligations

     554      161      227      131      35
    

  

  

  

  

Total

   $ 3,597    $ 653    $ 1,090    $ 1,070    $ 784

 

Cautionary Statement Regarding Forward-Looking Statements

 

Statements in this Quarterly Report on Form 10-Q, as well as oral statements that may be made by Repligen or by officers, directors or employees of Repligen acting on its behalf, that are not historical facts constitute “forward-looking statements” which are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements in this Quarterly Report on Form 10-Q do not constitute guarantees of future performance. Investors are cautioned that statements in this Quarterly Report on Form 10-Q which are not strictly historical statements, including, without limitation, statements regarding current or future financial performance, management’s strategy, litigation strategy, costs of legal proceedings, disputes with suppliers, plans and objectives for future operations, clinical trials and results, marketing plans, revenue potential of therapeutic product candidates, product research, intellectual property and development, manufacturing plans and performance, delays in manufacturing by us or our partners, timing of customer orders, the anticipated growth in our target markets, including, without limitation, the market for neuropsychiatric disorders treatment, the market for autoimmune disease treatment and the monoclonal antibody market and projected growth in product sales, costs of operations, sufficiency of funds to meet management objectives and availability of financing and effects of accounting pronouncements constitute forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause our actual results to be materially different from the historical results or from any results expressed or implied by such forward-looking statements, including, without limitation, risks associated with: the success of current and future collaborative relationships, the success of our clinical trials and our ability to develop and commercialize products, our ability to obtain required regulatory approvals, our compliance with all Food and Drug Administration regulations, our ability to obtain, maintain and protect intellectual property rights for our products, the risk of current and future litigation regarding our patent and other intellectual property rights, the risk of litigation with collaborative partners, our limited sales and marketing experience and capabilities, our limited manufacturing capabilities and our dependence on third-party manufacturers and value-added resellers, our ability to hire and retain skilled personnel, the market acceptance of our products, our ability to compete with larger, better financed pharmaceutical and biotechnology companies that may develop new approaches to the treatment of our targeted diseases, our history of losses and expectation of incurring continued losses, our ability to generate future revenues, our ability to raise additional capital to continue our drug development programs, our volatile stock price, the effects of our anti-takeover provisions. Further information on potential risk factors that could affect our financial results are included in the filings made by us from time to time with the Securities and Exchange Commission including under the section entitled “Certain Factors That May Affect Future Results” in our Annual Report on Form 10-K for the year ended March 31, 2004.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

Interest Rate Risk

 

We have investments in commercial paper, U.S. Government and agency securities as well as corporate bonds and other debt securities. As a result, we are exposed to potential loss from market risks that may occur as a result of changes in interest rates, changes in credit quality of the issuer or otherwise.

 

We generally place our marketable security investments in high quality credit instruments, as specified in our investment policy guidelines. A hypothetical 100 basis point increase in interest rates would result in an approximate

 

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$94,000 decrease in the fair value of our investments as of December 31, 2004. However, the conservative nature of our investments mitigates our interest rate exposure, and our investment policy limits the amount of our credit exposure to any one issue, issuer, (with the exception of U.S. treasury obligations) and type of instrument. We do not expect any material loss from our marketable security investments and therefore believe that our potential interest rate exposure is limited. We intend to hold these investments to maturity, in accordance with our business plans.

 

As of December 31, 2004, we did not have any debt arrangements that were not reflected in our balance sheet.

 

ITEM 4. CONTROLS AND PROCEDURES

 

As of December 31, 2004, Repligen, under the supervision and with the participation of Repligen’s management, including Walter C. Herlihy, Repligen’s Chief Executive Officer and President (Principal executive, accounting, and financial officer), evaluated the effectiveness of Repligen’s disclosure controls and procedures pursuant to Rule 13a-15(b) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, Repligen’s Chief Executive Officer and President (Principal executive, accounting, and financial officer) concluded that, as of December 31, 2004, Repligen’s disclosure controls and procedures are effective in ensuring that material information relating to Repligen required to be disclosed by Repligen in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such material information is accumulated and communicated to Repligen’s management, including Repligen’s Chief Executive Officer and President (Principal executive, accounting, and financial officer), as appropriate to allow timely decisions regarding required disclosure. During the period covered by this report, there have been no changes in Repligen’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, Repligen’s internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

On June 21, 2001 Repligen was named as a codefendant with the Regents of the University of California (the “Regents”) in an action filed by Pro-Neuron, Inc. (“Pro-Neuron”) (now known as Wellstat Therapeutics Corporation) in the Superior Court of California, County of San Diego alleging claims of breach of contract and seeking to void the License Agreement between Repligen and The University of California. (“UCSD License Agreements”). On November 16, 2004, the Regents, Pro-Neuron and Repligen entered into settlement agreements (the “Settlement”) under which Repligen and the Regents amended the UCSD License Agreements to exclude the field of acylated pyrimidines, including triacetyluridine (“TAU”). Pursuant to the Settlement, Repligen has agreed not to initiate any additional clinical studies of acylated pyrimidines, including TAU. Repligen agreed to assign to Pro-Neuron inventions, if any, from its previously completed Phase I study in bipolar disorder/major depression, involving the use of acylated pyrimidines, but Repligen will retain the rights to any inventions for all other chemical entities. Following the execution of the Definitive Agreements, Pro-Neuron and the Regents paid Repligen $750,000. Please also see our Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 and our Annual Report on Form 10-K for the year ended March 31, 2004 for more information on this legal proceeding.

 

From time to time, we may be subject to other legal proceedings and claims in the ordinary course of business. We are not currently aware of any such proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on the business, financial condition or results of operations.

 

ITEM 6. EXHIBITS

 

  (a) Exhibits

 

EXHIBIT

 

DESCRIPTION


3.1   Restated Certificate of Incorporation, dated June 30, 1992 and amended September 17, 1999 (filed as Exhibit 3.1 to Repligen Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 and incorporated herein by reference).
3.2   Certificate of Designation of Series A Junior Participating Preferred Stock dated March 4, 2003 (filed as Exhibit A of Exhibit 1 to Repligen Corporation’s Registration Statement on Form 8-A filed March 4, 2003 and incorporated herein by reference).

 

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3.3   Amended and Restated By-laws (filed as Exhibit 3.2 to Repligen Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 and incorporated herein by reference).
10.1*   Wellstat/Repligen Settlement Agreement by and among The Regents of the University of California, Robert Naviaux and Repligen Corporation and dated as of November 16, 2004 (with certain confidential information deleted) (filed herewith).
10.2*   Regents/Repligen Settlement Agreement by and between Wellstat Therapeutics Corporation (formerly Pro-Neuron, Inc.) and Repligen Corporation and dated as of November 16, 2004 (with certain confidential information deleted) (filed herewith).
31.1   Rule 13a-14(a)/15d-14(a) Certification (furnished herewith).
32.1   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).

* Confidential Treatment has been requested for portions of this exhibit and is pending clearance with the Securities and Exchange Commission.

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    REPLIGEN CORPORATION
Date: February 9, 2005   By:   

/s/ Walter C. Herlihy


         Chief Executive Officer and President,
         (Principal Executive, Financial and Accounting Officer)
         Repligen Corporation

 

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EXHIBIT INDEX

 

EXHIBIT

 

DESCRIPTION


3.1   Restated Certificate of Incorporation, dated June 30, 1992 and amended September 17, 1999 (filed as Exhibit 3.1 to Repligen Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 and incorporated herein by reference).
3.2   Certificate of Designation of Series A Junior Participating Preferred Stock dated March 4, 2003 (filed as Exhibit A of Exhibit 1 to Repligen Corporation’s Registration Statement on Form 8-A filed March 4, 2003 and incorporated herein by reference).
3.3   Amended and Restated By-laws (filed as Exhibit 3.2 to Repligen Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 and incorporated herein by reference).
10.1*   Wellstat/Repligen Settlement Agreement by and among The Regents of the University of California, Robert Naviaux and Repligen Corporation and dated as of November 16, 2004 (with certain confidential information deleted) (filed herewith).
10.2*   Regents/Repligen Settlement Agreement by and between Wellstat Therapeutics Corporation (formerly Pro-Neuron, Inc.) and Repligen Corporation and dated as of November 16, 2004 (with certain confidential information deleted) (filed herewith).
31.1   Rule 13a-14(a)/15d-14(a) Certification (furnished herewith).
32.1   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).

* Confidential Treatment has been requested for portion of this exhibit and is pending clearance with the Securities and Exchange Commission.