Expert Financial Analysis and Reporting

Overview

GE Healthcare, announced plans to launch a new chromatography resin in the first half of 2018 which will not use Repligen as the manufacturer of the associated protein A ligand. This news led to a 14% decrease in stock price from $43.22 at the close on September 25 to a closing price of $36.98 on September 26. Repligen currently accounts for over 95% of worldwide protein A sales and is the virtual sole supplier to GE.

Protein A as an integral component of the resin used in the first capture column in chromatography, which is typically a three column process used to separate a drug product from manufacturing impurities. Purity of over 95% is achieved with Protein A resins. Other lower cost resins (such as ion exchangers) are used in the next polishing steps to achieve complete purity. Protein A resins are the gold standard for purification of monoclonal antibody-based (mAbs) therapeutics, and virtually all mAbs on the market and in development today are purified using Protein A media.

The new GE resin provides higher capacity which enhances purification, but with a tradeoff in flow rate. Repligen views it as a niche product that will not displace existing resins being used for the >70 monoclonal antibodies currently marketed or the >300 in clinical development. The Protein A ligand used in the new resin will be manufactured by GE and/or a third party CMO. This move is in part a business continuity decision by GE to have more than one supplier of Protein A. Prior to 2011, the Swedish company Novozymes Biopharma was the second source supplier to GE, but Repligen acquired Novozymes Biopharma in 2011, making Repligen the sole supplier.

GE says that it is making a $70 million per year investment over the next 5 years in manufacturing capacity which suggests that it will be able to make large amounts of chromatography resins, including Protein A resins. In thinking about how this may affect Repligen there are several important things to keep in mind.

• Even slight changes in the manufacturing process have the potential to cause significant changes in the final drug product. Hence, it is not a simple matter to switch production of Protein A to a new manufacturer, as it requires a technology transfer and end customer validation process; it could take one to two years to get regulatory approval and certification from the drug manufacturer.
• GE says that this is part of a dual supplier strategy; Protein A is too critical to their resins business to take a single supplier risk.
• It also likely reflects expectations by GE that there will be explosive growth in monoclonal antibodies market and with that demand for Protein A ligands. It no doubt wants to assure that there will be adequate supply.

Putting This in Perspective for Repligen

In 2016, I estimate that Repligen’s Protein A sales were about $40 million with GE accounting for approximately $30 million and Merck Millipore roughly $10 million. The historical growth rate for sales of protein A has been about 8% to 9% per year and if that holds in the future, sales of RGEN’s Protein A in 2019 are likely to be about $47 million. Following the recent acquisition of Spectrum, I am estimating that Repligen’s total sales in 2019 will be about $195 million so that Protein A sales will be about 21% of total sales and with sales of Protein A to GE accounting for 15% of corporate sales and Merck Millipore 6%.

The key question investors are asking is what will happen to Repligen’s sales of Protein A to GE. Here are points to consider:

• Repligen supplies four Protein A ligands to GE which owns all four. All of these Protein A ligands manufactured by Repligen are under contract until 2019 in Lund, Sweden and until 2021 in Waltham, Massachusetts. These agreements are related to the facilities in which Protein A is produced rather than overall sales of Protein A.
• The Merck Millipore agreement extends out to 2023.
• Based on historical precedence, it could take five to seven years to establish GE’s new resin in the market place; it will be a slow build.
• Changing Protein A supply is a complicated process that requires regulatory and drug manufacturing certification which has to be undertaken for all of the >70 monoclonal antibodies on the market and >300 in development.
• GE’s primary motivation may be to have the security of a second source of supply. After all, the $30 million that it pays to Repligen is a rounding error in the context of GE healthcare and unnoticeable for GE as a whole. If so, they will value Repligen as their second source and will almost certainly continue to rely meaningfully on Repligen as a supplier.
• Some have speculated that Merck Millipore will also pursue a similar new strategy. However there is an important difference between these customers for Repligen. GE owns the 4 ligands that Repligen manufactures, and as such has sourcing choice. In the case of Merck Millipore, Repligen owns 2 of the 3 ligands that Merck Millipore buys.  Thus, the factors governing such a decision are much less compelling than for GE.

Investment Opinion

Like most investors I have talked to, I find it hard to put all these things in context and come up with a sales projection for Protein A. The one thing that seems certain is that there will be no discernible impact on sales through 2019 and only a minimal impact through 2021. Thereafter, it is difficult to conjure up a scenario in which GE ceases buying from Repligen. Indeed, there may be a better case to be made that sales to GE increase, but at a lesser rate than the historical and prospective 8%-9% for Protein A.  At this point, all of this is guesswork, of course.

This is obviously a negative, but one that Repligen has been strategically preparing for with its aggressive moves into products sold directly to drug manufacturers. The impact to the stock, if any, over the next two to five years will come from the negative effect on the P/E ratio. We are not likely to see much of an impact on sales or earnings.

I am definitely not going to sell any of my stock at present. My best judgment is that this is a manageable situation that will not have a meaningful effect on long term growth and is a buying opportunity. However, I am keeping an open mind and want to make sure that I have as much information as possible. Repligen is holding an analysts’ meeting on September 29 and I am sure that they will discuss in great detail their plans to manage through this situation. Barring some information from this meeting that runs counter to my analysis, I expect that I will continue with a Buy.