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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 September 30, 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of November 10, 2002.
Common Stock, par value $.01 per share 27,338,973
- -------------------------------------- ----------------
Class Number of Shares
REPLIGEN CORPORATION
INDEX
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements (Unaudited)
Balance Sheets as of September 30, 2002 and March 31, 2002 3
Statements of Operations for the Three Months and Six Months
Ended September 30, 2002 and 2001 4
Statements of Cash Flows for the Six Months
Ended September 30, 2002 and 2001 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Item 4. Controls and Procedures 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K 18
Signature 19
Certification 19
Exhibit Index 21
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REPLIGEN CORPORATION
BALANCE SHEETS
ASSETS September 30, 2002 March 31, 2002
------------------ --------------
Current assets: (Unaudited) (Audited)
Cash and cash equivalents $ 9,684,545 $ 8,696,194
Marketable securities 7,763,363 12,143,170
Accounts receivable, net 853,568 865,861
Inventory 901,003 916,091
Prepaid expenses and other current assets 644,876 622,309
------------- -------------
Total current assets 19,847,355 23,243,625
------------- -------------
Property and equipment, at cost:
Leasehold improvements 2,486,748 1,657,416
Equipment 1,282,411 1,169,080
Furniture and fixtures 352,174 352,174
------------- -------------
4,121,333 3,178,670
Less: accumulated depreciation and amortization 1,828,765 1,721,732
------------- -------------
2,292,568 1,456,938
Long term marketable securities 2,194,843 3,910,852
Restricted cash 500,000 500,000
------------- -------------
2,694,843 4,410,852
------------- -------------
Other assets, net (Note 8) 3,570,960 --
------------- -------------
Total assets $ 28,405,726 $ 29,111,415
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 534,854 $ 1,407,955
Accrued expenses 923,978 1,258,804
License fee payable 2,576,025 --
------------- -------------
Total current liabilities 4,034,857 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,
26,642,750 shares at September 30, 2002 and
26,642,750 shares at March 31, 2002 266,427 266,427
Additional paid-in capital 166,597,654 166,597,654
Accumulated deficit (142,493,212) (140,419,425)
------------- -------------
Total stockholders' equity 24,370,869 26,444,656
------------- -------------
Total liabilities and stockholders' equity $ 28,405,726 $ 29,111,415
============= =============
See accompanying notes to financial statements.
3
REPLIGEN CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
September 30, September 30,
2002 2001 2002 2001
------------------------------------------------------------------
Product sales $ 1,687,490 $ 886,733 $ 3,306,932 $ 1,599,268
Cost of product sold 661,797 554,600 1,331,443 911,039
------------ ------------ ------------ ------------
Gross Margin 1,025,693 332,133 1,975,489 688,229
Operating expenses:
Research and development 1,254,221 1,330,207 2,481,478 2,756,520
Selling, general and
administrative 1,009,734 680,518 1,891,991 1,297,935
------------ ------------ ------------ ------------
Total operating expenses 2,263,955 2,010,725 4,373,469 4,054,455
------------ ------------ ------------ ------------
Loss from operations (1,238,262) (1,678,592) (2,397,980) (3,366,226)
Investment and interest
income 155,614 301,720 324,193 645,845
------------ ------------ ------------ ------------
Net loss $ (1,082,648) $ (1,376,872) $ (2,073,787) $ (2,720,381)
============ ============ ============ ============
Basic and diluted net loss
per share $ (.04) $ (.05) $ (.08) $ (.10)
============ ============ ============ ============
Basic and diluted weighted
average common shares
outstanding 26,642,750 26,639,150 26,642,750 26,636,291
============ ============ ============ ============
See accompanying notes to financial statements.
4
REPLIGEN CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
September 30,
2002 2001
----------- ------------
Operating activities:
Net loss $(2,073,787) $ (2,720,381)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 362,097 165,347
Changes in operating assets and liabilities:
Accounts receivable 12,293 181,985
Inventory 15,088 (308,445)
Prepaid expenses and other current assets (22,567) (176,566)
Other assets (1,250,000) 56,882
Accounts payable (873,101) 28,195
Accrued expenses (334,826) 203,725
----------- ------------
Net cash used in operating activities (4,164,803) (2,569,258)
----------- ------------
Investing activities:
Redemption of marketable securities 7,121,989 5,996,839
Purchases of marketable securities (1,026,172) (15,937,171)
Purchases of property and equipment (942,663) (105,537)
----------- ------------
Net cash provided by (used in) investing activities 5,153,154 (10,045,869)
----------- ------------
Financing activities:
Proceeds from exercise of stock options -- 13,060
----------- ------------
Net cash provided by financing activities -- 13,060
----------- ------------
Net increase (decrease) in cash and cash equivalents 988,351 (12,602,067)
Cash and cash equivalents, beginning of period 8,696,194 16,163,625
----------- ------------
Cash and cash equivalents, end of period $ 9,684,545 $ 3,561,558
=========== ============
Supplemental Disclosure of Noncash operating activities:
Value of common stock exchanged for license $ 2,576,025 $ --
=========== ============
See accompanying notes to financial statements.
5
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 generates product revenues from the sale of its Protein A
products to customers in the pharmaceutical and process chromatography
industries. 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.
The Company applies Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition." SAB No. 101 requires companies to recognize certain upfront
nonrefundable fees and milestone payments over the life of the related agreement
when such fees are received in conjunction with agreements that have multiple
elements. The adoption of SAB No. 101 did not have a significant impact on the
Company's financial statements.
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 earnings per share. Basic net loss per share represents net loss
divided by the weighted average
6
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 September 30, 2002, there were outstanding options to purchase
1,839,900 shares of the Company's common stock at a weighted average exercise
price of $2.55 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 September 30, 2001,
there were outstanding options to purchase 1,688,841 shares of the Company's
common stock at a weighted average exercise price of $2.65 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. Also not included in the calculation of diluted earnings per
share are the 696,223 shares of common stock issued to ChiRhoClin, Inc. in
October 2002 in connection with a licensing agreement.
4. Cash, Cash Equivalents and Marketable Securities
The Company applies SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." At September 30, 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 six month periods
ending September 30, 2002 and 2001.
Cash, cash equivalents and marketable securities consist of the following
at September 30, 2002 and March 31, 2002:
September 30, March 31,
2002 2002
------------- -----------
Cash and cash equivalents
Cash $9,684,545 $ 8,696,194
---------- -----------
Total cash and cash equivalents $9,684,545 $ 8,696,194
========== ===========
Marketable securities
U.S. Government and agency securities $ -- $ 1,414,994
Corporate and other debt securities 7,763,363 10,728,176
---------- -----------
(Average of remaining maturity, 5.78 months
at September 30, 2002) $7,763,363 $12,143,170
========== ===========
Long-term marketable securities
U.S. Government and agency securities $ 993,342 $ --
Corporate and other debt securities 1,201,501 3,910,852
---------- -----------
(Average of remaining maturity, 17.80 months
at September 30, 2002) $2,194,843 $ 3,910,852
========== ===========
Restricted cash of $500,000 is related to the Company's facility lease
obligation.
7
5. Inventory
Inventory is stated at the lower of cost (first in, first out) or market
and consists of the following at September 30, 2002 and March 31, 2001.
September 30, March 31,
2002 2002
------------- --------
Raw materials and work-in-process $631,829 $652,940
Finished goods 269,174 263,151
-------- --------
Total $901,003 $916,091
======== ========
Work in process and finished goods inventories consist of material, labor,
outside processing costs and manufacturing overhead.
6. 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.
7. 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 Six Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
US 55% 12% 40% 44%
Europe 42% 86% 58% 54%
Other 3% 2% 2% 2%
--- --- --- ---
Total 100% 100% 100% 100%
During the three months ended September 30, 2002 there were two customers
who accounted for approximately 39% and 36% of the Company's revenues. During
the three months
8
ended September 30, 2001, there was one customer who accounted for approximately
85% of the Company's revenues. Two customers accounted for 72% and 13% of the
Company's accounts receivable at September 30, 2002. Two customers accounted for
69% and 24% of the Company's accounts receivable at March 31, 2002,
respectively.
8. Other Assets
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 and stimulation of gastrin
secretion to aid in the diagnosis of gastrinoma, a gastrointestinal tumor. Under
terms of its licensing agreement with ChiRhoClin, Inc. (CRC), Repligen paid a
milestone payment of $1,250,000 in cash and issued 696,223 shares of
unregistered common stock in October 2002. 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. As of September 30, 2002 the fair
value of the portion of the license fee payable in common stock is recorded as a
current liability in the accompanying balance sheet. 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
Repligen's 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 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.
9
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 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 intend to submit an IND to
test uridine in mitochondrial disease by year's end.
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, essential components of RNA, DNA and many 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 intend to submit an IND to test uridine in purine
autism by year's end.
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. We intend to extend this observation in
patients who have forms of depression which are not adequately treated with
current therapies. In some of these patients we intend to examine the effect of
uridine on changes in brain chemistry which may provide clues to its mechanism
of action.
In December 2000, the Company 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 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.")
10
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. Repligen owns 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 and
gastrinoma. In April 2002, the FDA approved the use of synthetic secretin
("SecreFlo(TM)") to aid in the diagnosis of pancreatic exocrine dysfunction or
chronic pancreatitis and diagnosis of gastrinoma, a form of cancer. 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 these diagnostic products in the U.S to hospital-based
gastroenterologists by our gastroenterology sales specialists. In October 2002,
we commenced selling SecreFlo(TM).
Revenue Recognition
The Company generates product revenues from the sale of its Protein A
products to customers in the pharmaceutical and process chromatography
industries. 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.
The Company applies SAB No. 101, "Revenue Recognition." SAB No. 101
requires companies to recognize certain upfront nonrefundable fees and milestone
payments over the life of the related alliance when such fees are received in
conjunction with alliances that have multiple elements. The adoption of SAB No.
101 did not have a significant impact on the Company's financial statements.
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.
11
Results of Operations
THREE MONTHS ENDED SEPTEMBER 30, 2002 VS. SEPTEMBER 30, 2001
Products Sold
Product sales for the three month periods ended September 30, 2002 and
September 30, 2001, were approximately $1,687,000,and $887,000 respectively, an
increase of $800,000 or 90%. This increase is largely 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 sold
Cost of product sold for the three month periods ended September 30, 2002
and September 30, 2001, were approximately $662,000 and $555,000, respectively,
an increase of $107,000 or 19%. This increase is due primarily to increased
costs associated with producing more product and the amortization cost of the
licensing payment to CRC made in connection with the FDA's recent approval of
SecreFlo(TM). Gross margin for products sold in the three month periods ended
September 30, 2002 and 2001 were $1,025,000 or 61% and $332,000 or 37%,
respectively. This increase in gross margin is due primarily to a change from
period to period in the mix of Protein A product sales.
Operating Expenses
Total operating expenses for the three month periods ended September 30,
2002 and September 30, 2001, were approximately $2,264,000 and $2,011,000,
respectively, an increase of $253,000 or 13%.
Research and development expenses for the three month period ended
September 30, 2002, compared to the three-month period ended September 30, 2001,
were approximately $1,254,000 and $1,330,000, respectively, a decrease of
$76,000 or 6%. This decrease is largely attributable to a decrease in clinical
material expenses generated in fiscal 2002 partially offset by an increase in
personnel costs and clinical trial expenses incurred during fiscal 2003.
Selling, general and administrative expenses (SG&A) for the three month
period ended September 30, 2002 compared to the three month period ended
September 30, 2001, were approximately $1,010,000 and $681,000, respectively, an
increase of $329,000 or 48%. This increase is largely attributable to increased
staffing and litigation expenses. We anticipate that this increase in SG&A
expenses will continue as we expand our commercial operations and as our legal
proceedings move to trial.
Investment and Interest Income
Investment income for the three month periods ended September 30, 2002 and
September 30, 2001, was approximately $156,000 and $302,000, respectively, a
decrease of $146,000 or 48%. This decrease is attributable to lower average
funds available for investment and lower interest rates during the three months
ended September 30, 2002 compared to the same period in fiscal 2002.
12
SIX MONTHS ENDED SEPTEMBER 30, 2002 VS. SEPTEMBER 30, 2001
Products sold
Year to date product revenues for the six month period ended September 30,
2002 and 2001, were approximately $3,307,000 and $1,600,000 respectively, an
increase of approximately $1,707,000 or 107%. This increase is largely
attributable to increased shipments to Amersham and other value-added resellers
during the period. 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 the Company's ability to optimize distribution of
its products.
Cost of Product sold
Cost of product sales for the six month period ended September 30, 2002
and 2001, were approximately $1,331,000 and $911,000, respectively, an increase
of approximately $420,000 or 46%. This increase is due primarily to increased
product sales and the amortization cost of the licensing payment to CRC made in
connection with the FDA's recent approval of SecreFloTM. Gross margin for
products sold in the six month periods ended September 30, 2002 and 2001 were
$1,976,000, or 60%, and $689,000, or 43%, respectively. This increase is largely
attributable to increased Protein A sales, the mix of products sold and
operational efficiencies that have been made in the manufacturing process.
Operating Expenses
Year to date operating expenses for the six month period ended September
30, 2002 and 2001, were approximately $4,374,000 and $4,055,000, respectively,
an increase of approximately $319,000 or 8%.
Research and development expenses for the six month period ended September
30, 2002 and September 30, 2001, were approximately $2,482,000 and $2,757,000,
respectively, a decrease of $275,000 or 10%. This decrease is largely
attributable to increases in personnel expenses and expenses associated with our
clinical trials offset by a decrease in clinical material costs.
Selling, general and administrative expenses for the six month periods
ended September 30, 2002 and September 30, 2001, were approximately $1,892,000
and $1,298,000, respectively, an increase of $594,000 or 46%. 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 six month period ended
September 30, 2002 and 2001, were approximately $324,000 and $646,000
respectively, a decrease of approximately $322,000 or 50%. This decrease is
attributable to lower average funds available for investment and lower interest
rates during the six months ended September 30, 2002 compared to the same period
in fiscal 2002.
13
Liquidity and Capital Resources
We have financed our operations primarily through private placements of
common stock and revenues derived from product sales and government grants.
Total cash, cash equivalents and marketable securities at September 30, 2002
totaled $20,143,000, a decrease of $5,107,000 from $25,250,000 at March 31,
2002.
Repligen's operating activities used cash of approximately $4,165,000 for
the six month period ended September 30, 2002, consisting of a net loss from
operations of approximately $2,074,000, a decrease in inventory of $15,000 and
accounts receivable of $12,000, and an increase in other assets of $1,250,000,
non-cash charges of $362,000 for depreciation and amortization, an increase to
prepaid expenses of $26,000, a decrease in accounts payable of $873,000 and
accrued expenses of $335,000.
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 $943,000 associated with the construction and
equipment necessary for the Company's 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 the Company's landlord. 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 in
restricted cash in the accompanying balance sheet as of September 30, 2002. In
October 2002, this letter of credit was reduced to $200,000.
During April 2002 and as required by the terms of our license agreement
with CRC, we paid a milestone payment of $1,250,000 in connection with the FDA's
approval of SecreFloTM, our synthetic porcine secretin 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 to be issued under 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 pay CRC
additional milestones in cash. We will be required to pay royalties on sales of
both synthetic porcine and human secretin diagnostic products.
Working capital decreased to $15,812,000 at September 30, 2002 from
$20,577,000 at March 31, 2002 as a result of research and development spending
and capital expenditures.
We expect to incur significantly higher costs in fiscal 2003 as a result
of expanded research and development costs associated with the expansion of
activities with clinical trials of our proprietary drug candidates and 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
14
development, we believe we have sufficient funding to satisfy our working
capital and capital expenditure requirements for the next twenty-four months.
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 the Repligen's 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 the actual results of the Company 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 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 the Company's financial
results are included in the filings made by the Company 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 and the change in credit quality of the issuer.
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, as the intention is to hold
these assets in accordance with our business plans.
15
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Based on an evaluation of Repligen's 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 Repligen's 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 at 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 pursuant to the Regent's agreement with Pro-Neuron. Pro-Neuron
subsequently moved to amend the complaint to include 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 for
mitochondrial disease 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. Bristol subsequently
filed patents claiming uses and compositions of CTLA4 naming only Bristol
scientists as inventors.
Both Repligen/University and Bristol filed motions for summary judgment in
March 2002. Repligen/University's motion requested an affirmative summary
judgment for Repligen/University's claims and Bristol's motion requested
dismissal of the complaint. A hearing on these motions was held on May 23, 2002.
On October 17, 2002 the judge denied both motions for summary judgment,
determining there are material facts in dispute which must be resolved at a
trial. In addition, the court granted a motion by Repligen/University for
affirmative summary judgment denying Bristol's ability to assert the defenses of
equitable estoppel and laches in this matter. The court denied a motion by
Repligen/University to exclude a declaration
16
by an inventor on the patents in the suit. The court has scheduled a trial for
April 2003. A correction of inventorship would result in the University/Repligen
having rights to some or all of Bristol's patents on CTLA4-Ig. Repligen would
then have rights to such technology pursuant to a 2000 License Agreement with
the University, a 1995 Asset Acquisition Agreement with Genetics Institute and
other related agreements. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's Annual Meeting of Stockholders (the "Annual Meeting") was
held on September 13, 2002. At the Annual Meeting, the stockholders of the
Company considered and acted upon a proposal to: (i) elect five members to the
Board of Directors (ii) to approve an amended and restated certificate of
incorporation and amended and restated by-laws and (iii) ratify the selection of
Ernst & Young LLP as the independent auditors of the Company for the fiscal year
ending March 31, 2003.
Proposal 1. Election of Directors:
The stockholders elected all of the Company's nominees for director.
Shares Voting Shares Voting
Directors In Favor Against
------------------------- ------------- -------------
Robert J. Hennessey* 23,085,435 923,656
Walter C. Herlihy, Ph.D.* 23,078,735 930,356
G. William Miller* 23,077,700 931,391
Alexander Rich, M.D.* 23,079,785 929,306
Paul Schimmel, Ph.D.* 23,084,235 924,856
* Incumbent
Proposal 2. Amendment and restatement of the certificate of incorporation and
by-laws
This proposal was not adopted.
Shares voting in favor: 6,132,472
Shares voting against: 1,510,147
Abstention: 53,523
Non-votes: 16,312,949
Proposal 3. Ratification of selection of Ernst & Young LLP as independent
auditors:
The stockholders approved the selection of Ernst & Young LLP as the Company's
independent auditors for fiscal year 2003.
Shares voting in favor: 23,913,718
Shares voting against: 65,963
Abstention: 29,410
17
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
The Company filed no current reports on Form 8-K during the quarter
covered by the report.
18
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: November 12, 2002 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 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;
19
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: November 12, 2002
/s/ Walter Herlihy
Chief Executive Officer and President,
Principal Financial and Accounting
Officer
20
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)
21