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REPLIGEN CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

August 11, 2014

Overview

We are a life sciences company that develops, manufactures and markets high-value, consumable bioprocessing products for life sciences companies and biopharmaceutical manufacturing companies worldwide. We are a world-leading manufacturer of both native and recombinant forms of Protein A, critical reagents used in biomanufacturing to separate and purify monoclonal antibodies, a type of biologic drug. We also supply several growth factor products used to increase cell culture productivity during the biomanufacturing process. In the expanding area of flexible biomanufacturing technologies, we have developed and currently market a series of OPUS (Open-Platform, User-Specified) chromatography columns for use in clinical-scale manufacturing. We generally manufacture and sell Protein A and growth factors to life sciences companies under long-term supply agreements and sell our chromatography columns, as well as media and quality test kits, directly to biopharmaceutical companies or contract manufacturing organizations. We refer to these activities as our bioprocessing business. Our manufacturing facilities are located in the United States and Sweden. On June 2, 2014, we acquired certain assets and assumed certain liabilities of Refine Technology, LLC ("Refine"), including Refine's Alternating Tangential Flow ("ATF") System, a market-leading device used to significantly increase product yield during the fermentation step of the biologic drug manufacturing process (the "Refine Business" and the acquisition of the Refine Business, the "Refine Acquisition") for total upfront consideration of approximately $25.2 million. The acquisition strengthens Repligen's bioprocessing business by adding a complementary product line while expanding our direct sales presence worldwide. Historically, Repligen also conducted activities aimed at developing proprietary therapeutic drug candidates, often with a potential of entering into a collaboration with a larger commercial stage pharmaceutical or biotechnology company in respect of these programs. In addition, we out-licensed certain intellectual property to Bristol-Myers Squibb Company, or Bristol, from which we received royalties on Bristol's net sales in the United States of their product Orencia®. These royalty payments from Bristol ceased on December 31, 2013. As part of our strategic decision in 2012 to focus our efforts on our core bioprocessing business, we reduced our efforts on our clinical development programs and increased our efforts to find collaboration partners to pursue the development and, if successful, the commercialization of these drug programs. The current status of our therapeutic drug development portfolio is:



• On January 21, 2014, we entered into an asset purchase agreement (the

"Asset Purchase Agreement") with BioMarin Pharmaceutical Inc. ("BioMarin")

to advance Repligen's histone deacetylase inhibitor (HDACi) portfolio.

Pursuant to the terms of the Asset Purchase Agreement, we received $2 million from BioMarin as an upfront payment on January 30, 2014. The Company is entitled to receive up to $160 million in potential future



milestone payments for the development, regulatory approval and commercial

sale of portfolio compounds included in the agreement. In addition,

Repligen is eligible to receive royalties on sales of therapeutic products

originating from the HDACi portfolio.



• On December 28, 2012, we out-licensed our spinal muscular atrophy program,

or SMA program, led by RG3039, a small molecule drug candidate in clinical

development for SMA, to Pfizer Inc., or Pfizer. Pursuant to the license

agreement, Pfizer assumed the majority of the costs associated with completing the required clinical trials for this program as well as obtaining U.S. Food and Drug Administration ("FDA") approval of the



respective new drug application ("NDA"). Under the license agreement, we

were obligated to conduct additional activities in support of this

program, which included completing the second cohort of the initial Phase

I trial for RG3039 and supporting the transition of the program to Pfizer.

We completed all of our obligations under the license agreement in 2013.



• Our clinical development portfolio also includes RG1068, a synthetic human

hormone developed as a novel imaging agent for the improved detection of

pancreatic duct abnormalities in combination with magnetic resonance

imaging in patients with pancreatitis and potentially other pancreatic

diseases. We submitted an NDA to the FDA and a marketing authorization

application to the European Medicines Agency in the first quarter of 2012.

In the second quarter of 2012, we received a complete response letter from

the FDA, indicating the need for additional clinical efficacy and safety

trial data. We have also received from the FDA the requirements for an

additional registration study. We believe this information may be a factor

in the decision by third-parties that may wish to pursue a development or

commercialization agreement with us for RG1068. We expect that any additional development activities in the future will be supported by sponsors or other third parties.



Critical Accounting Policies and Estimates

A "critical accounting policy" is one which is both important to the portrayal of the Company's financial condition and results and requires management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. For additional information, please see the discussion of our critical accounting policies in Management's Discussion and Analysis and our significant accounting policies in Note 2 to the Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2013. There have been no changes to our critical accounting policies since December 31, 2013, other than updating our revenue recognition policy. 19



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Results of Operations

Three months ended June 30, 2014 vs. June 30, 2013

Revenues

Total revenues for the three-month periods ended June 30, 2014 and 2013 were comprised of the following: Three months ended June 30, % Change 2014 2013 2014 vs. 2013 (in thousands, except percentages) Product revenue $ 15,551$ 13,014 19 % Royalty and other revenue - 4,495 -100 % Total revenue $ 15,551$ 17,509 -11 % Sales of bioprocessing products for the three months ended June 30, 2014 and 2013 were $15,551,000 and $13,014,000, respectively, an increase of $2,537,000, or 19%. This increase was primarily due to increases in orders from our key bioprocessing customers and the addition of the Refine Business. Sales of our bioprocessing products can be impacted by the timing of orders, development efforts at our customers or end-users and regulatory approvals for biologics that incorporate our products, which may result in significant quarterly fluctuations. Such quarterly fluctuations are expected, but they may not be predictive of future revenue or otherwise indicate a trend.



Pursuant to the settlement with Bristol, we recognized royalty revenue of $4,285,000 for the three months ended June 30, 2013. Our royalty agreement with Bristol provided that we would receive such royalty payments on sales of Orencia® by Bristol through December 31, 2013. These royalty payments have ceased.

For the three months ended June 30, 2013, we recognized $142,000 of revenue from a sponsored research and development project under an agreement with the National Institutes of Health / Scripps Research Institute.

We also recognized $68,000 of revenue from the upfront payment under the Pfizer License Agreement in the three months ended June 30, 2013.

Costs and operating expenses

Total costs and operating expenses for the three-month periods ended June 30, 2014 and 2013 were comprised of the following:

Three months ended June 30, % Change 2014 2013 2014 vs. 2013 (in thousands, except percentages) Cost of product revenue $ 6,672$ 5,298 26 % Cost of royalty revenue - 643 -100 % Research and development 1,430 2,306 -38 % Selling, general and administrative 4,325 3,124 38 % Contingent consideration - fair value adjustments 18 35 -49 % Total costs and operating expenses $ 12,445$ 11,406 9 % Cost of product revenue was approximately $6,672,000 and $5,298,000 for the three-month periods ended June 30, 2014 and 2013, respectively, an increase of $1,374,000 or 26%. This increase is primarily due to the increased product revenue noted above and the addition of the Refine Business. Gross margins may decline over the remainder of the 2014 based on expected production volume and shipments, and product mix. Pursuant to the settlement with Bristol, we remitted 15% of royalty revenue received through the expiration of the settlement agreement in December 2013 to the University of Michigan. For the three-month period ended June 30, 2013 this cost of royalty revenue was approximately $643,000. Research and development expenses were approximately $1,430,000 and $2,306,000 for the three-month periods ended June 30, 2014 and 2013, respectively, a decrease of $876,000 or 38%. This decrease is directly related to our decision in 2012 to exit therapeutic drug development and is partially offset by an increase in bioprocessing research and development expense. For the three-month periods ended June 30, 2014 and 2013, approximately $1,430,000 and $1,220,000, respectively, of our total research and development 20



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expenses were incurred on bioprocessing research and development activities. For each of the remaining quarters in 2014, we expect similar levels of research and development expenses, which relate primarily to bioprocessing product development, to those incurred in the quarter ended June 30, 2014. Selling, general and administrative expenses were approximately $4,325,000 and $3,124,000 for the three-month periods ended June 30, 2014 and 2013, respectively, an increase of $1,201,000 or 38%. This increase is primarily attributable to Refine acquisition costs of approximately $314,000 and higher employee related expenses of approximately $330,000. For each of the remaining quarters in 2014, we expect similar levels of selling, general and administrative expenses to those incurred in the quarter ended June 30, 2014 as we look to expand our customer-facing activities to drive sales of our bioprocessing products.



Investment income

Investment income includes income earned on invested cash balances. Investment income was approximately $85,000 and $66,000 for the three-month periods ended June 30, 2014 and 2013, respectively. This increase of $19,000, or 29%, is primarily attributable to higher average invested cash balances.



Other income (expense)

Other income (expense) was approximately $65,000 and ($122,000) for the three-month periods ended June 30, 2014 and 2013, respectively, and was primarily attributable to foreign currency gains related to our Sweden operations.

Provision for income taxes

For the three months ended June 30, 2014, we had income before taxes of approximately $3,243,000 and recorded a tax provision of approximately $418,000 for an effective tax rate of approximately 12.9%. This is based on an expected effective tax rate of 24.23% for the year ending December 31, 2014. The effective income tax rate is based upon the estimated income for the year and the composition of the income in different jurisdictions. The effective tax rate differs from the U.S. statutory tax rate primarily due to the lower statutory tax rate in Sweden.



Six months ended June 30, 2014 vs. June 30, 2013

Revenues

Total revenues for the six-month periods ended June 30, 2014 and 2013 were comprised of the following: Six months ended June 30, % Change 2014 2013 2014 vs. 2013 (in thousands, except percentages) Product revenue $ 29,886$ 24,948 20 % Royalty and other revenue 1,991 9,017 -78 % Total revenue $ 31,877$ 33,965 -6 % Sales of bioprocessing products for the six-month periods ended June 30, 2014 and 2013 were $29,886,000 and $24,948,000, respectively, an increase of $4,938,000, or 20%. This increase was primarily due to increases in orders from our key bioprocessing customers and the addition of the Refine Business. Sales of our bioprocessing products can be impacted by the timing of orders, development efforts at our customers or end-users and regulatory approvals for biologics that incorporate our products, which may result in significant quarterly fluctuations. Such quarterly fluctuations are expected, but they may not be predictive of future revenue or otherwise indicate a trend. In the six months ended June 30, 2014, we recognized $2 million of revenue under the Asset Purchase Agreement with BioMarin Pharmaceutical Inc. ("BioMarin") to advance Repligen's histone deacetylase inhibitor (HDACi) portfolio.



Pursuant to the settlement with Bristol, we recognized royalty revenue of $8,131,000 for the six months ended June 30, 2013. Our royalty agreement with Bristol provided that we would receive such royalty payments on sales of Orencia® by Bristol through December 31, 2013. These royalty payments have ceased.

For the six months ended June 30, 2013, we recognized $763,000 of revenue from a sponsored research and development project under an agreement with the National Institutes of Health / Scripps Research Institute. 21



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We recognized $124,000 of revenue from the upfront payment under the Pfizer License Agreement in the six months ended June 30, 2013.

Costs and operating expenses

Total costs and operating expenses for the six-month periods ended June 30, 2014 and 2013 were comprised of the following:

Six months ended June 30, % Change 2014 2013 2014 vs. 2013 (in thousands, except percentages) Cost of product revenue $ 13,007$ 12,194 7 % Cost of royalty revenue - 1,220 -100 % Research and development 2,631 4,490 -41 % Selling, general and administrative 7,709 6,432 20 % Contingent consideration - fair value adjustments 116 (19 ) 711 % Total costs and operating expenses $ 23,463$ 24,317 -4 % Cost of product revenue was approximately $13,007,000 and $12,194,000 for the six-month periods ended June 30, 2014 and 2013, respectively, an increase of $813,000 or 7%. This increase is primarily due to the increased product revenue noted above and the addition of the Refine Business. Gross margins may decline over the remainder of the 2014 based on expected production volume and shipments, and product mix. Pursuant to the settlement with Bristol, we remitted 15% of royalty revenue received through the expiration of the settlement agreement in December 2013 to the University of Michigan. For the six-month period ended June 30, 2013, this cost of royalty revenue was approximately $1,220,000. Research and development expenses were approximately $2,631,000 and $4,490,000 for the six-month periods ended June 30, 2014 and 2013, respectively, a decrease of $1,859,000 or 41%. This decrease is directly related to our decision in 2012 to exit therapeutic drug development and is partially offset by an increase in bioprocessing research and development expense. For the six-month periods ended June 30, 2014 and 2013, approximately $2,631,000 and $2,300,000, respectively, of our total research and development expenses were incurred on bioprocessing research and development activities. For the remaining half of 2014, we expect similar levels of research and development expenses, which relate primarily to bioprocessing product development, to those incurred in the first half of 2014. Selling, general and administrative expenses were approximately $7,709,000 and $6,432,000 for the six-month periods ended June 30, 2014 and 2013, respectively, an increase of $1,277,000 or 20%. This increase is primarily attributable to Refine acquisition costs of approximately $474,000 and higher sales and marketing expenses of approximately $290,000. For the remaining half of 2014, we expect similar levels of selling, general and administrative expenses to those incurred in the first half of 2014 as we look to expand our customer-facing activities to drive sales of our bioprocessing products.



Investment income

Investment income includes income earned on invested cash balances. Investment income was approximately $187,000 and $127,000 for the six-month periods ended June 30, 2014 and 2013, respectively. This increase of $60,000, or 47%, is primarily attributable to higher average invested cash balances.



Other income (expense)

Other income (expense) was approximately $68,000 and ($93,000) for the six-month periods ended June 30, 2014 and 2013, respectively, and was primarily attributable to foreign currency gains related to our Sweden operations.

Provision for income taxes

For the six months ended June 30, 2014, we had income before taxes of approximately $8,641,000 and recorded a tax provision of approximately $1,539,000 for an effective tax rate of approximately 17.8%. This is based on an expected effective tax rate of 24.23% for the year ending December 31, 2014. The effective income tax rate is based upon the estimated income for the year and the composition of the income in different jurisdictions. The effective tax rate differs from the U.S. statutory tax rate primarily due to the lower statutory tax rate in Sweden. 22



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Liquidity and capital resources

We have financed our operations primarily through sales of equity securities, revenues derived from product sales, research grants, and license arrangements, as well as proceeds and royalties from a litigation settlement. Our revenue for the foreseeable future will primarily be limited to our bioprocessing product revenue. At June 30, 2014, we had cash and marketable securities of $61,923,000 compared to $73,842,000 at December 31, 2013. A deposit for leased office space of $450,000 and $200,000 is classified as restricted cash and is not included in cash and marketable securities totals for June 30, 2014 or December 31, 2013, respectively. Operating activities For the six-month period ended June 30, 2014, our operating activities provided cash of $10,320,000 reflecting net income of $7,103,000 and non-cash charges totaling $2,945,000 including depreciation, amortization, stock-based compensation charges and deferred tax expense. The remaining cash flow provided by operations resulted from favorable changes in various working capital accounts, in particular the collection of the final Orencia royalty from Bristol Myers of $4.9 million and the tenant improvement allowance of $1.8 million from our landlord. For the six-month period ended June 30, 2013, our operating activities provided cash of $12,391,000 reflecting net income of $6,877,000 and non-cash charges totaling $3,065,000 including depreciation, amortization, stock-based compensation charges and deferred tax expense. The remaining cash flow provided by operations resulted from favorable changes in various working capital accounts, in particular the collection of $5 million due from Pfizer pursuant to our collaboration agreement. Investing activities We place our marketable security investments in high quality credit instruments as specified in our investment policy guidelines. Our investing activities consumed $16,853,000 for the six-month period ended June 30, 2014, primarily due to the Refine Acquisition, fixed asset additions and an increase in restricted cash, partially offset by net redemptions of marketable debt securities. For the six-month period ended June 30, 2013, our investing activities consumed $5,811,000, primarily due to net purchases of marketable debt securities as well as $1,105,000 used for fixed asset additions.



Financing activities

Exercises of stock options provided cash receipts of $1,338,000 and $2,035,000 in the six-month periods ended June 30, 2014 and 2013, respectively.

We do not currently use derivative financial instruments.

Working capital decreased by approximately $10,007,000 to $65,042,000 at June 30, 2014 from $75,049,000 at December 31, 2013 due to the various changes noted above.

Our future capital requirements will depend on many factors, including the following:

• the expansion of our bioprocessing business; • the ability to sustain sales and profits of our bioprocessing products; • the ability to replace the Orencia royalty revenue that we ceased

receiving at the end of 2013;



• the scope of and progress made in our research and development activities;

• our ability to acquire additional bioprocessing products; • the extent of any share repurchase activity; and • the success of any proposed financing efforts. Absent acquisitions of additional products, product candidates or intellectual property, we believe our current cash balances are adequate to meet our cash needs for at least the next 24 months. We expect to incur continued spending related to the development and expansion of our bioprocessing product lines for the foreseeable future. Our future capital requirements may include, but are not limited to, purchases of property, plant and equipment, the acquisition of additional bioprocessing products and technologies to complement our existing manufacturing capabilities, and continued investment in our intellectual property portfolio. We plan to continue to invest in our bioprocessing business and in key research and development activities associated with our efforts to identify and consummate development and commercialization partnerships. We actively evaluate various strategic transactions on an ongoing basis, including monetizing existing assets and licensing or acquiring complementary products, technologies or businesses that would complement our existing portfolio of development programs. We continue to seek to acquire such potential assets that may 23



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offer us the best opportunity to create value for our shareholders. In order to acquire such assets, we may need to seek additional financing to fund these investments. This may require the issuance or sale of additional equity or debt securities. The sale of additional equity may result in additional dilution to our stockholders. Should we need to secure additional financing to acquire a product, fund future investment in research and development, or meet our future liquidity requirements, we may not be able to secure such financing, or obtain such financing on favorable terms because of the volatile nature of the biotechnology marketplace.



Off-Balance Sheet Arrangements

We do not have any special purpose entities or off-balance sheet financing arrangements as of June 30, 2014.

Contractual obligations

As of June 30, 2014, we had the following fixed obligations and commitments: Payments Due by Period Less than 1 1 - 3 3 - 5 More than 5 (In thousands) Total Year Years Years Years

Operating lease obligations $ 15,739$ 2,555$ 5,170$ 2,896$ 5,118 Purchase obligations (1) 4,066 4,066 - - - Contingent consideration (2) 2,041 373 1,535 133 - Total $ 21,846$ 6,994$ 6,705$ 3,029$ 5,118



(1) Primarily represents purchase orders for the procurement of raw material for

manufacturing.

(2) Represents the current estimated fair value of contingent consideration

amounts relating to acquisitions. These amounts are recorded in accrued

expenses and long term liabilities on our consolidated balance sheets.

Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements which are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The forward-looking statements in this Quarterly Report on Form 10-Q do not constitute guarantees of future performance. Investors are cautioned that statements in this Quarterly Report on Form 10-Q which are not strictly historical statements, including, without limitation, express or implied statements or guidance regarding current or future financial performance and position, our strategic decision to focus on the growth of our bioprocessing business, management's strategy, plans and objectives for future operations or acquisitions, clinical trials and results, litigation strategy, product candidate research, development and regulatory approval, selling, general and administrative expenditures, intellectual property, development and manufacturing plans, availability of materials and product and adequacy of capital resources and financing plans constitute forward-looking statements. Such forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated, including, without limitation, risks associated with: the success of current and future collaborative or supply relationships, including our agreement with Pfizer and BioMarin, our ability to successfully negotiate and consummate development and commercialization partnerships for our portfolio of therapeutic and diagnostic assets on acceptable terms, if at all, our ability to successfully grow our bioprocessing business, including as a result of acquisition, commercialization or partnership opportunities, the success of our clinical trials and our ability to develop and commercialize products, our ability to obtain required regulatory approvals, our compliance with all Food and Drug Administration regulations, our ability to obtain, maintain and protect intellectual property rights for our products, the risk of litigation regarding our patent and other intellectual property rights, the risk of litigation with collaborative partners, our limited sales and marketing experience and capabilities, our limited manufacturing capabilities and our dependence on third-party manufacturers and value-added resellers, our ability to hire and retain skilled personnel, the market acceptance of our products, reduced demand for our products that adversely impacts our future revenues, cash flows, results of operations and financial condition, our ability to compete with larger, better financed pharmaceutical and biotechnology companies that may develop new approaches to the treatment of our targeted diseases, our history of losses and expectation of incurring losses, our ability to generate future revenues, our ability to successfully integrate Repligen Sweden and Refine, our ability to raise additional capital to continue our drug development programs or fund potential acquisitions, our volatile stock price, the effects of our anti-takeover provisions, and the impact of the expiration on December 31, 2013 of Bristol-Meyers Squibb royalty payments based on its U.S. sales of Orencia®. 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 "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2013. 24



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