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, 2002
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 (I.R.S. Employer
incorporation or organization) Identification No.)
41 Seyon Street, Bldg. 1.
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 |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of February 6, 2003.
Common Stock, par value $.01 per share 27,338,973
-------------------------------------- ----------
Class Number of Shares
2
REPLIGEN CORPORATION
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited)
Balance Sheets as of December 31, 2002 and March 31, 2002 3
Statements of Operations for the Three-Months and Nine-Months Ended
December 31, 2002 and 2001 4
Statements of Cash Flows for the Nine-Months
Ended December 31, 2002 and 2001 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 16
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 18
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 and Reports on Form 8-K 18
Signature 19
Certification 19
Exhibit Index 21
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REPLIGEN CORPORATION
BALANCE SHEETS
ASSETS December 31, 2002 March 31, 2002
----------------- --------------
Current assets:
Cash and cash equivalents $ 6,025,416 $ 8,696,194
Marketable securities 11,485,268 12,143,170
Accounts receivable, net 308,797 865,861
Inventory 1,035,060 916,091
Prepaid expenses and other current assets 676,950 622,309
------------- -------------
Total current assets 19,531,491 23,243,625
------------- -------------
Property and equipment, at cost:
Leasehold improvements 2,558,371 1,657,416
Equipment 1,300,359 1,169,080
Furniture and fixtures 354,167 352,174
------------- -------------
4,212,897 3,178,670
Less: accumulated depreciation and amortization 1,919,538 1,721,732
------------- -------------
2,293,359 1,456,938
Long term marketable securities 2,413,274 3,910,852
Restricted cash 200,000 500,000
------------- -------------
2,613,274 4,410,852
------------- -------------
Other assets, net (Note 10) 3,443,427 --
------------- -------------
Total assets $ 27,881,551 $ 29,111,415
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 703,859 $ 1,407,955
Accrued expenses 996,651 1,258,804
------------- -------------
Total current liabilities 1,700,510 2,666,759
------------- -------------
Stockholders' equity:
Preferred stock, $.01 par value -
authorized, 5,000,000 shares,-- outstanding, none -- --
Common stock, $.01 par value-
Authorized, 40,000,000 shares, -- outstanding,
27,338,973 shares at December 31, 2002 and
26,642,750 shares at March 31, 2002 273,390 266,427
Additional paid-in capital 169,166,716 166,597,654
Accumulated deficit (143,259,065) (140,419,425)
------------- -------------
Total stockholders' equity 26,181,041 26,444,656
------------- -------------
Total liabilities and stockholders' equity $ 27,881,551 $ 29,111,415
============= =============
See accompanying notes to financial statements.
4
REPLIGEN CORPORATION
STATEMENTS OF OPERATIONS
Three-Months Ended Nine-Months Ended
December 31, December 31,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Product revenue $2,417,030 $1,179,892 $5,723,962 $2,779,160
Cost of product revenue 1,140,908 585,099 2,472,351 1,496,137
---------- ---------- ---------- ----------
Gross margin 1,276,122 594,793 3,251,611 1,283,023
Operating expenses:
Research and development 1,363,059 1,021,386 3,844,537 3,777,906
Selling, general and
administrative 819,399 649,900 2,711,390 1,947,835
---------- ---------- ---------- ----------
Total operating expenses 2,182,458 1,671,286 6,555,927 5,725,741
---------- ---------- ---------- ----------
Loss from operations (906,336) (1,076,493) (3,304,316) (4,442,718)
Investment and interest
income 140,483 259,174 464,676 905,019
---------- ---------- ---------- ----------
Net loss $ (765,853) $ (817,319) $(2,839,640) $(3,537,699)
========== ========== ========== ==========
Basic and diluted net loss
per share $ (.03) $ (.03) $ (.11) $ (.13)
========== ========== ========== ==========
Basic and diluted weighted
average common shares
outstanding 27,316,021 26,642,319 26,979,385 26,638,306
========== ========== ========== ==========
See accompanying notes to financial statements.
5
REPLIGEN CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine-Months Ended Nine-Months Ended
December 31, 2002 December 31, 2001
Operating activities:
Net loss $ (2,839,640) $ (3,537,699)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 580,405 214,339
Changes in operating assets and liabilities:
Accounts receivable 557,064 (79,532)
Inventory (118,969) (278,668)
Prepaid expenses and other current assets (54,641) (86,588)
Accounts payable (704,097) (106,386)
Accrued expenses (262,153) 196,099
------------ ------------
Net cash used in operating activities $ (2,842,031) $ (3,678,435)
------------ ------------
Investing activities:
Redemption of marketable securities $ (5,266,466) $$13,425,710
Purchases of marketable securities 7,421,946 (19,629,444)
Other assets (1,250,000) 56,882
Decrease/ (increase) in restricted cash 300,000 (500,000)
Purchases of property and equipment (1,034,227) (144,423)
------------ ------------
Net cash provided by (used in) investing
activities $ 171,253 $ (6,791,275)
------------ ------------
Financing activity:
Proceeds from exercise of stock options $ -- $ 14,108
------------ ------------
Net cash provided by financing activity $ -- $ 14,108
------------ ------------
Net decrease in cash and cash equivalents $ (2,670,778) $(10,455,602)
Cash and cash equivalents, beginning of period 8,696,194 16,163,625
------------ ------------
Cash and cash equivalents, end of period $ 6,025,416 $ 5,708,023
============ ============
Supplemental Disclosure of Noncash operating
activities:
Value of common stock exchanged for license $ 2,576,025 $ --
============ ============
See accompanying notes to financial statements.
6
REPLIGEN CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The financial statements included herein have been prepared by Repligen
Corporation (the "Company" or "Repligen"), 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 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 the Company's Form 10-K
for the year ended March 31, 2002.
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 of the Company.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.
The Company has reclassified certain prior-year information to conform to
the current year's presentation.
2. Revenue Recognition
The Company applies Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition" to its revenue arrangements.SAB No. 101 requires companies to
recognize certain upfront nonrefundable fees over the life of the related
agreement when such fees are received in conjunction with agreements that have
multiple elements.
The Company generates product revenues from the sale of its Protein A
products to customers in the pharmaceutical and process chromatography
industries and from the sale of SecreFlo(TM), the first synthetic version of the
hormone secretin, to hospital-based gastroenterologists.The Company recognizes
revenue related to product sales upon shipment of the product to the customer
(the point of title transfer), as long as there is persuasive evidence of an
arrangement, the fee is fixed or determinable and collection of any related
receivable is probable.
3. Net Loss Per Share
The Company applies Statement of Financial Accounting Standard ("SFAS")
No. 128, "Earnings per Share."SFAS No. 128 establishes standards for computing
and presenting
7
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.Accordingly, basic and diluted
net loss per share is the same.At December 31, 2002, there were outstanding
options to purchase 1,838,900 shares of the Company's common stock at a weighted
average exercise price of $2.13 per share and warrants to purchase 404,946
shares of the Company's common stock at a weighted average exercise price of
$5.24 per share not included in the calculation of earnings per share.At
December 31, 2001, there were outstanding options to purchase 1,714,441 shares
of the Company's common stock at a weighted average exercise price of $2.24 per
share and warrants to purchase 404,946 shares of the Company's common stock at a
weighted average exercise price of $5.24 per share not included in the
calculation of earnings per share.
4. Impairment of Long-Lived Assets
In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". SFAS 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and does not apply
to goodwill or intangible assets that are not being amortized and certain other
long-lived assets. This Statement supersedes FASB Statement No.121,"Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" and the accounting and reporting provisions of APB Opinion No. 30 "Reporting
the Results of Operations, Reporting the Effects of Disposal of a Segment of a
business and extraordinary, Unusual and Infrequently Occurring Events and
Transactions", for the disposal of a segment of a business (as previously
defined in that Opinion).SFAS 144 is effective for financial statements issued
for fiscal years beginning after December 15, 2001 with early adoption
encouraged. SFAS No. 144 requires companies to test its long-lived assets for
recoverability whenever events or changes in circumstances indicate that its
carrying value may not be recoverable.As of December 31, 2002, the Company
believes that the carrying value of its long-lived assets are recoverable.
5. Recent Accounting Pronouncements
In July 2002, the FASB issued SFAS 146, "Accounting for Cost Associated
with Exit or Disposal Activities".SFAS 146 requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan and nullifies Emerging
Issues Task Force Issue No. 94-3. "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit and Activity(including Certain
Costs Incurred in a Restructuring)". SFAS 146 is to be applied prospectively to
exit or disposal activities initiated after December 31, 2002. The Company does
not believe the adoption of this standard will result in any material impact on
its financial statements at this time.
In December 2002, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 148, Accounting for Stock-Based Compensation -- Transition
and Disclosure, which amends SFAS 123, Accounting for Stock-Based Compensation.
In response to a growing number of companies announcing plans to record expenses
for the fair value of stock options, SFAS 148 provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 amends the
disclosure
8
requirements of FAS 123 to require more prominent and more frequent disclosures
in financial statements about the effects of stock-based compensation. The
amendments to Statement 123 in paragraphs 2(a)-2(e) of this Statement shall be
effective for financial statements for fiscal years ending after December 15,
2002. The Company does not expect this statement to have a significant impact on
the financial statements.
6. Cash, Cash Equivalents and Marketable Securities
The Company applies SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities."At December 31, 2002, the Company's cash equivalents
and marketable securities are classified as held-to-maturity, as the Company has
the positive intent and ability to hold to maturity.As a result, these
investments are recorded at amortized cost.Cash equivalents are short-term,
highly liquid instruments with original maturities of 90 days or less.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.The Company has not realized any gains or losses on its
marketable securities for the three-month or nine- month periods ending December
31, 2002 and 2001.
Cash, cash equivalents and marketable securities consist of the following
at December 31, 2002 and March 31, 2002:
December 31, March 31,
2002 2002
---- ----
Cash and cash equivalents
Cash $ 6,025,416 $ 8,696,194
----------- -----------
Total cash and cash equivalents $ 6,025,416 $ 8,696,194
=========== ===========
Marketable securities
U.S. Government and agency securities $ 718,198 $ 1,414,994
Corporate and other debt securities 10,767,070 10,728,176
----------- -----------
(Average remaining maturity, 3.77 months
at December 31, 2002) $11,485,268 $12,143,170
=========== ===========
Long-term marketable securities
U.S. Government and agency securities $ 1,102,304 $ --
Corporate and other debt securities 1,310,970 3,910,852
----------- -----------
(Average remaining maturity, 16.63 months
at December 31, 2002) $ 2,413,274 $ 3,910,852
=========== ===========
Restricted cash of $200,000 is related to the Company's facility lease
obligation.
7. Inventory
Inventory is stated at the lower of cost (first in, first out) or market
and consists of the following at December 31, 2002 and March 31, 2002.
December 31, March 31,
2002 2002
---- ----
Raw materials and work-in-process $ 627,734 $ 652,940
Finished goods 407,326 263,151
----------- -----------
Total $ 1,035,060 $ 916,091
=========== ===========
9
Work in process and finished goods inventories consist of material, labor,
outside processing costs and manufacturing overhead.
8. Comprehensive Income
The Company applies 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.The Company's comprehensive loss is equal to
its reported net loss for all periods presented.
9. Disclosures about Segments of an Enterprise and Significant Customers
The Company applies 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, the Company has
viewed its operations and manages its business as principally one operating
segment.As a result, the financial information disclosed herein represents all
of the material financial information related to the Company's principal
operating segment.
The following table represents the Company's revenue by geographic area:
Three-Months Ended Nine-Months Ended
December 31, December 31,
2002 2001 2002 2001
---- ---- ---- ----
US 60% 27% 48% 38%
Europe 39% 71% 50% 60%
Other 1% 2% 2% 2%
---- ---- ---- ----
Total 100% 100% 100% 100%
During the three months ended December 31, 2002 two customers each
accounted for approximately 34% of the Company's revenues.During the nine months
ended December 31, 2002 two customers accounted for approximately 38% and 30% of
the Company's revenues.During the three months ended December 31, 2001, there
were two customers who accounted for approximately 54% and 20% of the Company's
revenues, respectively. During the nine months ended December 31, 2001, two
customers accounted for approximately 52% and 26% of the Company's revenues.Four
customers accounted for 15%, 11%, 17% and 26% of the Company's accounts
receivable at December 31, 2002, respectively.Two customers accounted for 69%
and 24% of the Company's accounts receivable at March 31, 2002, respectively.
10. Other Assets
10
In April 2002, the United States Food and Drug Administration granted
approval to market SecreFlo(TM) (synthetic porcine secretin), the first
synthetic version of the hormone secretin. SecreFlo(TM) has been approved for
stimulation of pancreatic secretions to aid in the diagnosis of pancreatic
exocrine dysfunction, or chronic pancreatitis, stimulation of gastrin secretion
to aid in the diagnosis of gastrinoma, a gastrointestinal tumor and to aid
during a gastrointestinal procedure called Endoscopic Retrograde
Cholangiopancreatography (ERCP).Under the terms of its licensing agreement with
ChiRhoClin, Inc. (CRC), Repligen made a milestone payment to CRC during April
2002 of $1,250,000 in cash.The Company also issued 696,223 shares of its
unregistered common stock to CRC in October 2002 related to the same
milestone.During the quarter ended June 30, 2002, the Company recorded the fair
value of these shares, $2,576,025, and the cash of $1,250,000, as a long-term
intangible asset.Beginning in April 2002, this amount will be amortized to cost
of product revenue over the remaining term of the license, approximately seven
years.In addition, Repligen will be required to pay future royalties to CRC
related to product sales in cash.In October 2002, Repligen commenced selling
SecreFlo(TM).
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Our goal is to become the leader in the development of new products for
profound pediatric developmental disorders.Our therapeutic product candidates
are secretin for autism, uridine for neurologic and metabolic diseases and
CTLA4-Ig for autoimmune disorders. These products are synthetic forms of
naturally-occurring substances which may correct improperly regulated biological
processes with minimal toxicity or side-effects. Our product candidates have the
potential to produce clinical benefits not attainable with any existing drug in
diseases for which there are few alternative therapies or treatments.
Autism is a profound developmental disorder characterized by deficits in
social interaction, impaired communication, and repetitive behaviors.A recent
study by the Centers for Disease Control and Prevention found a prevalence rate
for autism in children of 1 in 300, a rate greater than leukemia, cystic
fibrosis and multiple sclerosis combined.Based on our Phase 2 clinical data and
discussions with the FDA, we are currently conducting two randomized,
placebo-controlled, double-blind Phase 3 clinical trials to evaluate the impact
of secretin on the social interaction deficits of autism in children 2.7 to 4.9
years of age.Each child will receive six doses of secretin or a placebo over 18
weeks and will be evaluated with the social interaction scale of the Autism
Diagnostic Observation Schedule and with a Clinical Global Impression of Change.
In February 2000, we were issued a broad U.S. patent covering the use of
secretin in the treatment of autism.We are currently prosecuting additional
patent applications in the United States, Europe and Japan. There are currently
no drugs approved by the FDA for the treatment of autism.
Mitochondria are structures found in every cell, which convert nutrients
into energy for cellular processes.Mitochondrial diseases are characterized by
impaired function of many systems and organs, particularly skeletal muscles
(weakness, poor motor skills), the nervous system (seizures, poor cognition) and
dysfunction of the heart and kidney.Mitochondria are the only cellular
(non-dietary) source of uridine and its synthesis may be impaired in patients
with
11
mitochondrial disease.Uridine is a naturally occurring substance required by all
cells for the synthesis of RNA, DNA and other essential biological
factors.Published reports have suggested that daily administration of uridine or
a derivative of uridine to patients with mitochondrial diseases was well
tolerated by the patients and produced symptom improvements in some patients. We
have completed toxicity testing in animals and we have submitted an
Investigational New Drug application (IND) to the FDA and we plan to initiate a
clinical trial of uridine in mitochondrial disease later this year.
We are evaluating the potential of uridine (or analogs of uridine) for
several neurological disorders for which there is unmet medical need. "Purine
autism" is a form of autism in which patients appear to have a defect in the way
they metabolize purines, which are essential components of RNA, DNA and other
essential biological factors.Research at Repligen has confirmed that
approximately 15-20% of patients with autistic symptoms have evidence of this
metabolic abnormality.Several patients with "purine autism" have been treated by
others with daily, oral dosing of uridine. We have submitted an IND to the FDA
and we plan to initiate a clinical trial of uridine in purine autism later this
year.
Preclinical studies have demonstrated that uridine is active in an animal
model of depression.As previously reported, studies carried out by our
collaborators at Harvard Medical School indicate that uridine is active in a
widely accepted model of depression. A trial to assess the effect of a prodrug
of uridine has been initiated at McLean Hospital in patients with either bipolar
disease or depression.In addition to standard clinical evaluations of safety and
efficacy, the trial will evaluate potential changes in brain chemistry by
functional Magnetic Resonance Imaging.
In December 2000, we licensed from the University of California, San Diego
exclusive rights to U.S. patent applications covering novel methods for the
treatment of mitochondrial disease and novel methods for treatment of purine
autism.(For more information on our intellectual property rights to uridine and
related compounds for the treatment of mitochondrial disease, please see "Legal
Proceedings.")
Immune thrombocytopenic purpura ("ITP") is an autoimmune disease in which
the patient's immune system mounts an attack on his or her own blood platelets
which can result in internal bleeding. CTLA4 signals the immune system to "turn
off" after it has successfully cleared a bacterial or viral infection.We have
created an injectable form of CTLA4-Ig which we believe will have a wide
application in diseases characterized by over-activation of the immune system.We
are currently conducting a Phase 1/2 clinical trial of CTLA4-Ig in patients with
refractory ITP.
In September 2002, we were granted a U.S. patent for the specific product
form of CTLA4-Ig which we are developing.Repligen has also obtained an exclusive
license to the patent rights of the University of Michigan which pertain to
CTLA4-Ig and is prosecuting patents filed by the University of Michigan related
to therapeutic uses of CTLA4-Ig.We also believe that the University of Michigan
and Repligen are entitled to rights to certain U.S. patents on compositions and
therapeutic uses of CTLA4 which have been issued to Bristol-Myers Squibb
Company. (For more information on our intellectual property rights to CTLA4-Ig,
please see "Legal Proceedings.")
12
Our business strategy is to partially fund the development of our
proprietary therapeutic products with the profits derived from the sales of our
Specialty Pharmaceutical products; Protein A and SecreFlo(TM).This will enable
us to independently advance our proprietary drug development programs while at
the same time minimizing our operating losses.We intend to seek additional
current product opportunities to increase our current product revenues as we
increase expenditures on clinical development of our therapeutic products.
We manufacture and market products for the production of therapeutic
monoclonal antibodies.We currently market a line of products for the
purification of antibodies based on a naturally occurring protein, Protein A,
which can specifically bind to antibodies.We own composition of matter patents
for recombinant Protein A in the United States.In December 1998, we entered into
a ten-year agreement to supply recombinant Protein A to Amersham Pharmacia
Biotech ("Amersham"), a leading supplier to the biopharmaceutical market.
In October 1999, we licensed exclusive commercial rights to two diagnostic
products based on synthetic forms of porcine (pig-derived) and human secretin
from a private company.Both of these products have been evaluated in clinical
trials for their safety and efficacy in diagnosing chronic pancreatitis,
gastrinoma, and as an aid during ERCP.In April 2002, the FDA approved the use of
secretin for injection ("SecreFlo(TM)") to aid in the diagnosis of pancreatic
exocrine dysfunction or chronic pancreatitis and diagnosis of gastrinoma, a form
of cancer.In November 2002, the FDA approved the use of SecreFlo(TM) to aid
during a gastrointestinal procedure called ERCP.The FDA has granted SecreFlo(TM)
Orphan Drug Designation, which means it is the only form of secretin marketed
for the approved indications in the United States until 2009.We market this
diagnostic product in the U.S. to hospital-based gastroenterologists by our
gastroenterology sales specialists.In October 2002, we commenced selling
SecreFlo(TM).
Revenue Recognition
We apply SAB No. 101, "Revenue Recognition." SAB No. 101 requires
companies to recognize certain upfront nonrefundable fees over the life of the
related alliance when such fees are received in conjunction with alliances that
have multiple elements.
We generate product revenues from the sale of our Protein A products to
customers in the pharmaceutical and process chromatography industries and from
sales of SecreFlo(TM) to hospital-based gastroenterologists.We recognize revenue
related to product sales upon shipment of the product to the customer (the point
of title transfer), as long as there is persuasive evidence of an arrangement,
the fee is fixed or determinable and collection of any related receivable is
probable.
Critical Accounting Policies
We considered the disclosure requirements of FR-60 regarding critical
accounting policies and FR-61 regarding liquidity and capital resources, certain
trading activities and related party/certain other disclosures, and concluded
that there were no material changes during the quarter that would warrant
further disclosure under these releases.
Results of Operations
THREE-MONTHS ENDED DECEMBER 31, 2002 VS. DECEMBER 31, 2001
13
Product Revenue
Product revenue for the three-month periods ended December 31, 2002 and
December 31, 2001, were approximately $2,417,000 and $1,180,000, respectively,
an increase of $1,237,000 or 105%. During the three-month period ended December
31, 2002, we commenced selling SecreFlo(TM), a diagnostic product that is
marketed in the U.S., to hospital based gastroenterologists.In addition, this
increase in product sales is attributable to increased demand from value-added
resellers who incorporate our Protein A products into their proprietary antibody
purification systems, which they sell to the biotechnology and pharmaceutical
industry.
Cost of Product Revenue
Cost of product revenue for the three-month periods ended December 31,
2002 and December 30, 2001, were approximately $1,141,000 and $585,000,
respectively, an increase of $556,000 or 95%.This increase is due primarily to
increased costs associated with the increase in volume of product shipments and
costs associated with our recently launched SecreFlo(TM). Gross margin for
products sold in the three-month periods ended December 31, 2002 and 2001 were
$1,276,000 or 53% and $595,000 or 50%, respectively.This increase in gross
margin is due primarily to a change from period to period in the mix of Protein
A product sales and the commencement of SecreFlo(TM) sales.
Operating Expenses
Total operating expenses for the three-month periods ended December 31,
2002 and December 31, 2001, were approximately $2,182,000 and $1,671,000,
respectively, an increase of $511,000 or 31%.
Research and development expenses for the three-month period ended
December 31, 2002, and December 31, 2001, were approximately $1,363,000 and
$1,021,000, respectively, an increase of $342,000 or 33%.This increase is
largely attributable to an increase in personnel costs and clinical trial
expenses incurred during fiscal 2003, partially offset by in part a decrease in
clinical material expenses generated in fiscal 2002.
Selling, general and administrative expenses (SG&A) for the three-month
period ended December 31, 2002 as compared to the three-month period ended
December 31, 2001, were approximately $819,000 and $650,000 respectively, an
increase of $169,000 or 26%.This increase is largely attributable to increased
staffing and litigation expenses partially offset by a reimbursement by CRC of
premarketing and launch expenses associated with the launch of SecreFlo(TM).We
anticipate that SG&A expenses will increase as our litigation activities
continue and due to our increase in marketing expenses as we expand our
commercial operations.
Investment and Interest Income
Investment income for the three-month periods ended December 31, 2002 and
December 31, 2001, was approximately $140,000 and $259,000, respectively, a
decrease of $119,000 or 46%.This decrease is attributable to lower average funds
available for investment and lower interest rates during the three months ended
December 31, 2002 as compared to the same period in fiscal 2002.
NINE-MONTHS ENDED DECEMBER 31, 2002 VS. DECEMBER 31, 2001
Product Revenue
14
Year to date product revenue for the nine-month periods ended December 31,
2002 and 2001, were approximately $5,724,000 and $2,779,000 respectively, an
increase of approximately $2,945,000 or 106%. This increase is largely
attributable to increased sales to value-added resellers during the period.In
addition, in fiscal 2003, we commenced selling SecreFlo(TM), a diagnostic
product that is marketed in the U.S., to hospital based gastroenterologists.Our
revenues will fluctuate from quarter to quarter and from year to year depending
upon, among other factors, demand for the Company's products, new product
introductions and our ability to optimize distribution of our products.
Cost of Product Revenue
Cost of product revenue for the nine-month periods ended December 31, 2002
and 2001, were approximately $2,472,000 and $1,496,000, respectively, an
increase of approximately $976,000 or 65%.This increase is due primarily to
increased volume of product shipments. Gross margin for products sold in the
nine-month periods ended December 31, 2002 and 2001 were $3,252,000, or 57%, and
$1,283,000, or 46%, respectively. This increase is largely attributable to
increased Protein A sales, the mix of products sold and increased operational
efficiencies that have been made in the manufacturing process.
Operating Expenses
Year to date operating expenses for the nine-month periods ended December
31, 2002 and 2001, were approximately $6,556,000 and $5,726,000, respectively,
an increase of approximately $830,000 or 14%.
Research and development expenses for the nine-month periods ended
December 31, 2002 and December 31, 2001, were approximately $3,845,000 and
$3,778,000, respectively, an increase of $67,000 or 2%.This increase is largely
attributable to increases in personnel expenses and expenses associated with our
clinical trials, offset by a decrease in clinical material costs generated in
fiscal 2002.
Selling, general and administrative expenses for the nine-month periods
ended December 31, 2002 and December 31, 2001, were approximately $2,711,000 and
$1,948,000, respectively, an increase of $763,000 or 39%.This increase is
largely attributable to increased staffing, litigation expenses and expenses
associated with the company's relocation to its new corporate headquarters.
Investment and Interest Income
Year to date total investment income for the nine-month periods ended
December 31, 2002 and 2001, were approximately $465,000 and $905,000
respectively, a decrease of approximately $440,000 or 49%. This decrease is
attributable to lower average funds available for investment and lower interest
rates during the nine months ended December 31, 2002 as compared to the same
period in fiscal 2002.
Liquidity and Capital Resources
15
We have financed our operations primarily through private placements of
our common stock and revenues derived from product sales, collaborative research
agreements, government grants, and payments received pursuant to licensing and
royalty agreements.Total cash, cash equivalents and marketable securities at
December 31, 2002 totaled $19,924,000 a decrease of $4,826,000 from $24,750,000
at March 31, 2002.
Our operating activities used cash of approximately $2,842,000 for the
nine-month period ended December 31, 2002, consisting of a net loss from
operations of approximately $2,840,000, an increase in inventory of $119,000, an
increase in prepaid expenses of $54,000, a decrease in accounts payable of
$704,000 and accrued expenses of $262,000. These uses of cash were offset by
non-cash charges of $580,000 for depreciation and amortization and a decrease in
accounts receivable of $557,000.
We have leased, pursuant to a ten-year lease agreement, a new corporate
headquarters in Waltham, Massachusetts.We anticipate that this new facility will
increase operating efficiencies and manufacturing capacity to meet the growing
demand for our Protein A products, and to better meet corporate goals and
objectives.We relocated to this facility in May 2002.Our cash was reduced by
capital expenditures of $1,034,000 in the first nine months of fiscal 2003
associated with the construction and equipment necessary for our new corporate
offices. Annual rent expense associated with this new facility will increase
approximately $230,000 over prior year's rent expense due to the additional
space in this new facility.In connection with this lease agreement, a letter of
credit in the amount of $500,000 was issued to our landlord.In October 2002,
this letter of credit was reduced to $200,000. The letter of credit is
collateralized by a certificate of deposit held by the bank that issued the
letter of credit.The certificate of deposit is included as restricted cash in
the accompanying balance sheet as of December 31, 2002.
During April 2002 and as required by the terms of our license agreement
with CRC, we made a milestone payment of $1,250,000 in cash in connection with
the FDA's approval of SecreFlo(TM), our secretin for injection porcine
product.Also pursuant to such license agreement, we issued to CRC 696,223 shares
of our common stock in October 2002.We have not granted registration rights to
CRC with respect to the shares pursuant to the license agreement.In addition,
under the terms of our license agreement with CRC, if the FDA approves the new
drug application for the human synthetic secretin diagnostic product, we will be
required to make additional milestones payments in cash to CRC.We will be
required to pay royalties on sales of both synthetic porcine and human secretin
diagnostic products.
Working capital decreased to $17,831,000 at December 31, 2002 from
$20,577,000 at March 31, 2002 as a result of research and development spending
and capital expenditures.
We expect to incur higher operating costs as a result of expanded research
and development costs associated with the activities associated with clinical
trials of our proprietary drug candidates and continued marketing support for
the launch of our diagnostic product, SecreFlo(TM) and costs associated with our
litigation.While we anticipate that the cost of operations will increase as we
continue to expand our investment in proprietary product development, we believe
we have sufficient funding to satisfy our working capital and capital
expenditure requirements for the next twenty-four months.
16
Should we need to secure additional financing to meet our future liquidity
requirements, there can be no assurances that we will be able to secure such
financing, or that such financing, if available, will be on terms favorable to
us.
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 21E of the Securities Exchange Act of 1934.The
forward-looking statements in this Quarterly Report on Form 10-Q do not
constitute guarantees of future performance.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, market acceptance of our products, our
ability to compete with larger, better financed pharmaceutical and biotechnology
companies, new approaches to the treatment of our targeted diseases, our
expectation of incurring continued losses, our ability to generate future
revenues, our ability to raise additional capital to continue our drug
development programs, the success of our clinical trials, 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 litigation regarding our intellectual property rights, our limited sales
and manufacturing capabilities, our dependence on third-party manufacturers and
value-added resellers, our ability to hire and retain skilled personnel, and our
volatile stock price.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, 2002.
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.Our
investment policy also limits the amount of credit exposure to any one issue,
issuer (with the exception of US treasury obligations), and type of
investment.We intend to hold these investments to maturity, in accordance with
our business plans.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
17
Based on an evaluation of our disclosure controls and procedures as of a
date (the "Evaluation Date") within 90 days of the filing of this Quarterly
Report on Form 10-Q, the President, Chief Executive Officer and Principal
Financial and Accounting Officer, Walter C. Herlihy, has concluded that, as of
the Evaluation Date, the disclosure controls and procedures are effective.
Changes in Internal Controls
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the
Evaluation Date.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 21, 2001, Pro-Neuron, Inc. filed a complaint (the "Pro-Neuron
Complaint") against the Regents of the University of California (the "Regents")
and Repligen in the Superior Court of California, County of San Diego seeking to
void the License Agreement relating to treatment of mitochondrial disease
entered into between Repligen and the University of California, San Diego
("UCSD") in December 2000 (the "UCSD License Agreement").The Pro-Neuron
Complaint, among other things, requests that the court order the Regents to
assign all rights licensed to Repligen pursuant to the UCSD License Agreement to
Pro-Neuron. Pro-Neuron subsequently amended the complaint to include claims for
misappropriation of trade secrets.The Regents and Repligen believe that the
Pro-Neuron Complaint is without merit and intend to vigorously defend their
rights. If Pro-Neuron is successful in this action, Repligen's ability to
commercialize uridine may be limited.
Repligen is the exclusive licensee of all CTLA4 patent rights owned by the
University of Michigan ("the University").Repligen and the University believe
that the University has a rightful claim to ownership of certain CTLA4 related
patents of Bristol-Myers Squibb Company ("Bristol").Repligen and the University
filed a complaint against Bristol in the United States District Court for the
Eastern District of Michigan in August 2000 seeking a correction of
inventorship.The suit asserts that a scientist from the University made
inventive contributions as part of a collaboration with Bristol scientists and
is a rightful inventor on the patents issued to Bristol.
In March 2002, Repligen and the University jointly filed a motion for
summary judgment on their claims and Bristol filed a motion requesting that
judgment be entered against Repligen and the University. On October 17, 2002 the
court denied both motions for summary judgment, determining there are material
facts in dispute which must be resolved at a trial.However, the court granted a
separate summary judgment motion filed by Repligen and the University denying
Bristol's ability to assert the defenses of equitable estoppel and laches in
this matter. The court has scheduled the trial for April 2003.A correction of
inventorship would result in the University and Repligen having rights to some
or all of Bristol's patents on CTLA4-Ig. Repligen's failure to obtain ownership
rights in the Bristol patents may restrict Repligen's ability to commercialize
CTLA4-Ig.Repligen and the University have also filed patents related to
compositions of matter and methods of use of CTLA4-Ig.In September 2002,
Repligen was issued a U.S. patent covering the composition of the CTLA4-Ig
product form that it is developing.
18
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On October 4, 2002, Repligen Corporation issued 696,223 shares of common
stock (the "Shares") to ChiRhoClin, Inc. ("CRC") in a private placement
transaction as required by the terms of our Licensing Agreement with CRC dated
as of September 30, 1999 and in connection with the FDA's approval of
SecreFlo(TM), our secretin for injection product. The issuance of the Shares was
a milestone payment in consideration of CRC's success in obtaining FDA approval
to market secretin for injection. Pursuant to the Licensing Agreement, CRC has
granted Repligen exclusive world-wide rights to market SecreFlo(TM), secretin
for injection.
There were no underwriters employed in connection with the transaction set
forth above. The issuance of the Shares described above was deemed to be exempt
from registration under the Securities Act of 1933, as amended (the "Securities
Act"), in reliance on Section 4(2) of the Securities Act as a transaction by an
issuer not involving a public offering. CRC, the sole recipient of the Shares,
represented its intention to acquire the Shares for investment purposes only and
not with a view to, or for sale in connection with, any distribution thereof and
appropriate legends were affixed to the share certificate issued in such
transaction. CRC represented that it either received adequate information about
Repligen or had access, through business or other relationships, to such
information and had the opportunity to ask questions of and receive answers from
representatives of Repligen concerning the finances, operations and business of
Repligen. CRC represented that it was knowledgeable, sophisticated and
experienced in making investment decisions of this kind and capable of
evaluating the merits and risks of the investment.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(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 By-laws (filed as Exhibit 3.2 to Repligen Corporation's
Annual Report on Form 10-K for the year ended March 31,
2002 and incorporated herein by reference).
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (filed herewith)
(b) Reports on Form 8-K
1) Current Report on Form 8-K, filed on October 7, 2002,
reporting Repligen's issuance of 696,223 shares of its common
stock to ChiRhoClin, Inc.;
19
2) Current Report on Form 8-K, filed on October 21, 2002,
reporting an update in the status of the suit by Repligen and
the University of Michigan against Bristol-Myers Squibb
Company;
3) Current Report on Form 8-K, filed November 12, 2002 reporting
an update in the status of the suit by Repligen and the
University of Michigan against Bristol-Myers Squibb Company.
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
(Registrant)
Date:February 7, 2003 By: /s/ Walter C. Herlihy
------------------------------------------
Chief Executive Officer and President,
Principal Financial and Accounting Officer
CERTIFICATION
I, Walter Herlihy, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Repligen
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made
20
known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a). All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were any significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: February 7, 2003
/s/ Walter C. Herlihy
--------------------------------------------------
Chief Executive Officer and President,
Principal Financial and Accounting Officer
21
Repligen Corporation
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 By-laws (filed as Exhibit 3.2 to Repligen Corporation's
Annual Report on Form 10-K for the year ended March 31,
2002 and incorporated herein by reference).
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (filed herewith)
22