Repligen
Annual Report 2007

Plain-text annual report

2007 ANNUAL REPORT TO OUR SHAREHOLDERS: Our goal is to develop and commercialize novel products for the treatment of Central Nervous System (CNS) disorders. We have a three-step strategy to achieve our goal: First, we will seek to increase the profits from We expect continued growth in product the sale of our existing products to provide sales in the next year, progress on realizing a source of funding for the acquisition and the value of our patents and strengthening development of our CNS product candidates. of our therapeutic pipeline through develop- Second, we intend to vigorously enforce our patent rights which may provide additional cap- ital for investment in our product candidates. Third, we will seek to strengthen our product pipeline through development of our existing ment of our existing product candidates and, potential in-licensing of additional CNS prod- uct candidates. I look forward to keeping you informed of our progress. product candidates and through in-licensing Sincerely, of new product candidates which can be eval- uated clinically without “betting the company” on any single product. Walter C. Herlihy, Ph.D. President and CEO During the past year we have made significant July 8, 2007 progress on each of these goals. Increased sales and profits from our products, progress in enforcing our patent rights and the acquisi- tion of a new product development candidate are evidence of our success. OUR MISSION OUR STRATEGY Repligen’s mission is to develop novel therapeu- To achieve our goal we plan to make significant tics for CNS disorders for which there is signifi- investments in product development. Our efforts cant unmet medical need. We intend to build a will be partially funded from the profits from our sustainable franchise focused on meeting the current products and any future cash streams we needs of patients and care providers in several may realize from the licensing of our patents. We CNS disorders. plan to out-license any product candidates which may have utility in therapeutic categories other than CNS. Cash provided by these activities will make us less dependent on the sale of equity to fund our operations. In addition, our commercial products business enables us to gain valuable expertise in manufacturing and marketing prior to the commercialization of our CNS product candidates. We believe that a clear focus on a single therapeutic category will enable us to benefit from synergies in research, product development and commercialization. CORPORATE MILESTONES This year we achieved important milestones toward building a self-sustaining, integrated biopharmaceutical company. 1.0 MARKETED PRODUCTS Our revenues grew to $14.1 million consisting primarily of sales of our Protein A products. We completed the construction of a multi-thousand liter fermentation facility which increases our capacity to manufacture our Protein A products. 2.0 INTELLECTUAL PROPERTY We received Summary Judgement in our favor in the ongoing litigation against ImClone Systems, Inc. based on the manufacture and sale of Erbitux®. The trial is currently scheduled for September 2007. A trial date of April 2008 is currently scheduled for our lawsuit against Bristol-Myers Squibb for infringement of our patent covering the use of CTLA4-Ig to treat rheumatoid arthritis. 3.0 PRODUCT PIPELINE We completed a positive Phase 2 clinical trial to evaluate the use of secretin to improve the diagnostic quality of an MRI image of the pancreas. We also received Orphan Drug Designation for this use which qualifies us for seven years of marketing exclusivity if we are the first to the market. Completed enrollment in a Phase 2a clinical trial of an oral formulation of uridine to treat bipolar depression. We licensed rights to intellectual property covering compounds which may have utility in treating Friedreich’s ataxia. OUR ASSETS Over the past year our marketed products have continued to provide a growing stream of revenue and profits, allowing us to invest in our patents and the development of our pipeline without the financial risks normally associated with a clinical stage biotechnology company. PRODUCT PIPELINE MARKETED PRODUCTS PRECLINICAL PHASE I PHASE II PHASE III MARKET Protein A Antibody Purification SecreFlo® GI Diagnosis INTELLECTUAL PROPERTY Erbitux® Colon, Head and Neck Cancer Orencia® Rheumatoid Arthritis PRODUCT PIPELINE Secretin Pancreatic MRI Uridine Bipolar Depression Other Neurology Transcription Activators Friedreich’s Ataxia Erbitux ® and Orencia® are registered trademarks of ImClone Systems, Inc. and Bristol-Myers Squibb, respectively. 15 10 5 0 0 -2 -4 -6 -8 30 20 10 0 TOTAL REVENUE (dollars in millions) OPERATING LOSS (dollars in millions) CASH & INVESTMENTS (dollars in millions) 14.1 $15 10 5 0 $0 (2) (4) (6) (8) (1.8) $30 20 10 0 22.6 2005 2006 2007 2005 2006 2007 2005 2006 2007 REPLIGEN CORPORATION 1.0 MARKETED PRODUCTS 2.0 INTELLECTUAL PROPERTY MARKETED PRODUCTS “Enhancer” Patent Repligen is the world’s leading supplier of recombinant Protein A, a consumable used in the production of the vast majority of monoclonal antibodies. Protein A’s unique and broadly applicable properties provide a powerful purification tool resulting in lower costs for manufacturers. There are currently 18 monoclonal antibodies that have received reg- ulatory approval with more than 150 products in develop- ment. Monoclonal antibodies are the largest and fastest growing class of drug in the biopharmaceutical industry with revenues forecast to exceed $30 billion in 2010. Last year we recorded $11.1 million from sales of our Protein A P.2 products and we anticipate demand will continue to grow along with the growth of the monoclonal antibody market. INTELLECTUAL PROPERTY Repligen has a long history of scientific innovation which has been recognized by the receipt of many patents. We have rights to patents on two products: Erbitux®, approved for treatment of colorectal and head and neck cancer and Orencia® (CTLA4-Ig), approved for treatment of rheuma- toid arthritis. Repligen and MIT own rights to a U.S. patent, which covers certain genetic elements that increase protein production in a mammalian cell. Repligen and MIT filed an action against ImClone for infringement of this patent based on ImClone’s manufacture and sale of Erbitux®. In the complaint we allege that the cell line that ImClone uses to produce Erbitux® employs a key technology that is claimed in the patent. The Court issued a ruling on Summary Judgement in our favor and rejected ImClone’s previously asserted defense of patent exhaustion, eliminating this argument as a potential defense for ImClone at trial. Recently, the Court imposed sanctions on ImClone for misconduct by its attorneys. The trial is currently set for September 2007. ImClone has reported approximately $1.5 billion in sales to date of Erbitux® in the U.S. CTLA4-Ig Patent In the 1990s our collaborators at the University of Michigan and the U.S. Navy demonstrated that CTLA4-Ig, one of the immune system’s natural “off switches,” could be used to treat certain autoimmune diseases in animal models. Repligen owns the exclusive rights to a U.S. patent that covers a method of treating rheumatoid arthritis with CTLA4-Ig that will remain in force until 2021. CTLA4-Ig’s mechanism of action is different from current therapies for 2007 ANNUAL REPORT 3.0 PRODUCT PIPELINE arthritis and may provide a treatment for patients refractory showed highly significant increases in physician confidence to existing therapies. In 2005, Bristol-Myers Squibb received FDA approval to market CTLA4-Ig for treatment of rheumatoid arthritis, under the brand name Orencia®. Subsequently, we filed a lawsuit against Bristol for infringement of our patent. Our goal is to license our patent to Bristol in exchange for royalties whether through a court action or a negotiated to identify structural abnormalities, the number of pancre- atic duct segments visualized and improvements in the overall image quality. Detailed assessment of the pancre- atic ducts is important in the diagnosis and treatment of acute and chronic pancreatitis. There may be more than 100,000 MRI images in the U.S. each year that could bene- fit from the use of secretin. settlement. Analysts expect the annual sales of Orencia® The Office of Orphan Products Development of the FDA to reach $1 billion within five years. A trial date is currently granted us orphan drug designation for the use of secretin set for April 2008. PRODUCT PIPELINE Secretin for Imaging of the Pancreas The literature supports the use of secretin with abdominal MRI imaging to improve visualization of the pancreas and with MRI imaging, which qualifies us for seven years of marketing exclusivity in the U.S. if we are the first to receive marketing approval. We are in the process of defin- P.3 ing the registration path with the FDA. We are also con- ducting a pilot study to evaluate the use of secretin in abdominal imaging to assess the function of the pancreas. to increase diagnostic sensitivity. The use of MRI is attrac- Uridine for Bipolar Depression tive for patient care as it can obviate the need for more Uridine is a biological compound essential for the synthesis risky invasive procedures. We have completed a positive of DNA, RNA and numerous other factors essential for Phase 2 clinical trial to evaluate the use of secretin with cell metabolism. Uridine is synthesized by the power plant MRI to improve imaging of the pancreas. The study showed of the human cell known as the mitochondria. Research improved sensitivity to detect structural abnormalities of indicates that mitochondrial dysfunction is involved in bipo- the pancreatic duct of approximately 20% with no loss lar disorder, which suggests that uridine may be useful in in specificity, consistent with prior data. The study also this disease. REPLIGEN CORPORATION We are conducting a Phase 2 clinical trial of uridine in bipo- no treatment for Friedreich’s ataxia, which affects approxi- lar disorder to assess the impact on the depressive symp- mately one in every 50,000 people in the U.S. toms of the disease. We have completed enrollment in this study in which approximately 80 patients received uridine or a placebo for 6 weeks and we expect to have trial results in the fall. Bipolar disorder is an illness marked by extreme changes in mood, energy and behavior in which a person can alternate between states of mania and depression. More than 2 million adults in the U.S. have bipolar disorder. The Stanley Medical Research Institute, the largest nonprofit provider of funding for research on schizophrenia and bipo- Research conducted in tissue samples from patients as well as in mice indicates that these compounds increase production of the protein frataxin, which suggests potential utility in slowing or stopping progression of the disease. Preliminary data also suggests that these compounds may have utility in treating other disorders such as spinal muscular atrophy and Huntington’s disease. We are work- ing to identify a drug candidate for the clinic. lar disorder in the U.S., has provided support for this study. Finances and Business Strategy P.4 Transcription Activators for Friedreich’s Ataxia Consistent with our goal for last year to expand our pipe- line, we licensed rights to intellectual property covering compounds which may have utility in treating Friedreich’s ataxia. Friedreich’s ataxia is caused by a single gene defect Profits from our products are used to partially fund the development of our patents and our pipeline. For fiscal year 2007 we reported an operating loss of $1.8 million and ended the year with $22.6 million in cash and invest- ments and no debt. that results in inadequate production of the protein frataxin. Our sound financial condition enables us to maintain owner- Low levels of frataxin lead to degeneration of both the ship of our pipeline candidates through “proof-of-principle” nerves controlling muscle movements in the arms and clinical trials at which point we may seek a partner for fur- legs and the nerve tissue in the spinal cord. Symptoms of ther development and marketing. We believe our diverse Friedreich’s ataxia typically emerge between the ages of asset base and sound business strategy provide us a 5 and 15 and often progress to severe disability, incapac- unique opportunity to develop products for unmet medical itation or loss of life in early adulthood. There is currently needs to the benefit of both patients and shareholders. REPLIGEN CORPORATION Index to Business and Financial Information for the Year Ended March 31, 2007 Selected Financial Data Business Management’s Discussion and Analysis of Financial Condition and Results of Operations F.2 F.3 F.8 F.1 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities F.16 Stock Price Performance Graph F.17 Statements of Operations F.17 Balance Sheets F.18 Statements of Cash Flows F.19 Statements of Stockholders’ Equity F.20 Notes to Financial Statements F.21 Report of Independent Registered Public Accounting Firm F.34 Management’s Annual Report on Internal Control Over Financial Reporting F.35 Attestation Report of the Independent Registered Public Accounting Firm F.36 2007 ANNUAL REPORT SELECTED FINANCIAL DATA The following selected financial data are derived from the audited financial statements of Repligen. The selected financial data set forth below should be read in conjunction with our financial statements and the related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this annual report and our Annual Report on Form 10-K for the years ended March 31, 2007, 2006, 2005, 2004 and 2003. Revenue: Product revenue Other revenue Total revenue Operating expenses: Cost of product revenue Research and development Selling, general and administrative Impairment of long-lived asset Total operating expenses Income (loss) from operations Interest expense Investment income Other income Net income (loss) Earnings Per Share: Basic and diluted Years ended March 31, 2007 2006 2005 2004 2003 (In thousands except per share amounts) $ 13,074 1,000 $ 12,529 382 $ 14,074 12,911 3,615 5,924 6,360 — 15,899 (1,825) (11) 947 — 3,551 5,163 5,417 — 14,131 (1,220) (3) 750 1,170 9,360 — 9,360 3,888 5,037 4,597 — $ 6,843 71 6,914 3,248 6,484 4,710 2,413 $ 7,743 29 7,772 3,480 5,227 4,159 — 13,522 (4,162) 16,855 (9,941) 12,866 (5,094) — 428 750 — 390 — — 557 — $ (889) $ 697 $ (2,984) $ (9,551) $ (4,537) $ (0.03) $ 0.02 $ (0.10) $ (0.32) $ (0.17) F.2 Weighted average shares outstanding: Basic Diluted 30,379 30,379 30,125 30,691 30,062 30,062 29,686 29,686 26,813 26,813 Balance Sheet Data: Cash and marketable securities* Working capital Total assets Long-term obligations Accumulated deficit Stockholders’ equity As of March 31, 2007 2006 2005 2004 2003 (In thousands) $ 22,627 22,394 29,076 200 (157,683) 25,538 $ 23,408 18,575 28,599 231 (156,794) 25,433 $ 23,523 15,673 27,607 120 (157,491) 24,290 $ 24,269 13,684 29,615 86 (154,507) 27,164 $ 18,709 15,602 26,793 2 (144,956) 24,550 * Excludes restricted cash of $200,000 restricted as part of our headquarters lease arrangement for all years presented. REPLIGEN CORPORATION BUSINESS The following discussion of our business contains forward-looking statements that involve risks and uncertainties. When used in this report, the words “intend,” “anticipate,” “believe,” “estimate,” “plan” and “expect” and similar expressions as they relate to us are included to identify forward-looking state- ments. Our actual results could differ materially from those anticipated in these forward-looking state- ments and are a result of certain factors, including those set forth under “Risk Factors” in our Annual Report on Form 10-K. Our Company Repligen Corporation (“Repligen,” the “Company” or “we”) is developing novel therapeutics for the treatment of diseases of the central nervous system. We also own intellectual property on two biological therapies which may provide future revenues to sup- port our product development efforts in neurological diseases. We also are a leading manufacturer of Protein A which is used in the production of many therapeutic monoclonal antibodies. Our business strategy is to maintain full commercial rights to our product candidates through “proof of principle” clinical studies after which we may seek corporate partners for further development and mar- keting. We partially fund the development of our proprietary therapeutic product candidates with the profits derived from the sales of our commercial products. This will enable us to independently advance our products with less financial risk. We were incorporated in May 1981, under the laws of the State of Delaware. Our principle execu- tive offices are at 41 Seyon Street, Waltham, Massachusetts 02453 and our telephone number is (781) 250-0111. Currently Marketed Products We currently sell two products: Protein A, which is used in the production of monoclonal antibodies, and SecreFlo®, a synthetic form of the hormone secretin, which is used as an aid in the diagnosis of certain diseases of the pancreas. Protein A Products for Antibody Manufacturing Protein A is widely used in the purification of thera- peutic monoclonal antibodies. Most therapeutic monoclonal antibodies are manufactured by the fer- mentation of mammalian cells that express the monoclonal antibody. The monoclonal antibody is typically produced by a process in which an impure fermentation broth containing the desired monoclo- nal antibody is passed over a solid support to which Protein A has been chemically attached or “immobi- lized.” The immobilized Protein A binds the monoclo- nal antibody while other impurities are washed away. The monoclonal antibody is then recovered from the support in a substantially purified form. We manufacture and market several products based on recombinant forms of Protein A. Our primary customers incorporate our Protein A products into their proprietary monoclonal antibody purification systems that they sell directly to the biotechnology and pharmaceutical industry. In February 2005, we announced an amended and expanded Supply Agreement (“the Agreement”) with GE Healthcare (“GEHC”), the leading supplier of purification prod- ucts to the biopharmaceutical industry and the larg- est consumer of Protein A. The Agreement calls for Repligen to be the primary supplier of Protein A to GEHC through 2010. During 2006, we completed the scaleup and production of a modified form of Protein A for GEHC, which may provide additional value to the producers of monoclonal antibodies. In addition, we have a long-term supply agreement with Applied Biosystems that provides that Repligen will be the preferred provider of recombinant Protein A to Applied Biosystems until 2011. The majority of our product sales for the last three years have been sales of Protein A products. Sales of therapeutic monoclonal antibodies have increased from $300 million in 1997 to approximately $20 billion in 2006. This growth is based on the increasing use of therapeutic antibodies, including Erbitux® for colon cancer, Synagis® for RSV infection and Remicade® for Crohn’s disease and arthritis. There are more than 150 additional monoclonal anti- bodies in various stages of clinical testing which may lead to additional growth of the antibody market and, in turn, increased demand for Protein A. SecreFlo® for Pancreatic Diagnosis In October 1999, we licensed exclusive commercial rights to a diagnostic product based on a synthetic form of porcine ( pig - derived ) secretin, which we market as SecreFlo ®, from ChiRhoClin, Inc. (“ChiRhoClin”), a private company. ChiRhoClin is our sole supplier of SecreFlo®. SecreFlo® is approved by the U.S. Food and Drug Administration (“FDA”) as an aid in the diagnosis of chronic pancreatitis and gastrinoma (a form of cancer) and as an aid during endoscopic retrograde cholangiopancreatography (“ERCP”), a gastrointestinal procedure. In 2004, we terminated our agreement with ChiRhoClin for breach and filed an arbitration proceeding against ChiRhoClin for their alleged failure to meet certain obligations related to product and clinical development. In May 2005, we announced the settlement of the arbitra- tion proceeding through an agreement by which we will continue to sell SecreFlo®. We estimate that sales of SecreFlo® will continue through March 2009, when our product supply will cease. 2007 ANNUAL REPORT F.3 F.4 BUSINESS (continued) Intellectual Property on Monoclonal Antibody and Antibody Fusion Products Erbitux ® Erbitux® is a monoclonal antibody developed by ImClone Systems Incorporated (“ImClone”) which was approved by the FDA in February 2004 for the treatment of certain forms of colon cancer and in March 2006 for the treatment of head and neck can- cer. We believe that Erbitux® is manufactured with a cell line created by a company whose assets were subsequently acquired by Repligen. This cell line contains certain patented genetic technologies (“DNA enhancers”) which increase the productivity of a cell line. This patent is assigned to MIT and exclusively licensed to Repligen. ImClone previously announced that it had manufactured approximately $1 billion of Erbitux® as of February 2004. ImClone has reported that nearly all of this pre-approval stock- pile of Erbitux® was exhausted by the end of Decem- ber 2005. In May 2004, Repligen and MIT jointly filed a lawsuit against ImClone in U.S. District Court for Massachusetts alleging that ImClone has infringed our patent rights in its production of Erbitux®. Our patent expired in May 2004 and we have applied for a 5-year term extension for the pat- ent, or until May 2009. CTLA4-Ig CTLA4 is a key regulator of the activity of the immune system. CTLA4 “turns off” the immune system after it has successfully cleared a bacterial or viral infec- tion by blocking the activation of T-cells, the immune cells responsible for initiating an immune response. In the 1990’s, our collaborators at the University of Michigan and the U.S. Navy demonstrated in animal models that a fusion protein consisting of fragments of CTLA4 and an antibody (“CTLA4-Ig”) could be used to block organ transplant rejection and to treat certain autoimmune diseases. Additional animal and human studies by many other groups have confirmed that CTLA4-Ig may be useful in treating diseases such as rheumatoid arthritis, multiple sclerosis, lupus, psoriasis and organ transplant rejection. CTLA4-Ig’s mechanism of action is different from the current therapies for autoimmune disease or organ trans- plant rejection, thus it may provide a treatment for patients who are refractory to existing therapies. In December 2005, the FDA approved Bristol-Myers Squibb Corporation’s (“Bristol”) application to mar- ket CTLA4-Ig, under the brand name Orencia®, for treatment of rheumatoid arthritis. Bristol started commercial sales of Orencia® in February 2006. In January 2006, Repligen and the University of Michigan jointly filed a lawsuit against Bristol in the United States District Court for the Eastern District of Texas for infringement of U.S. Patent No. 6,685,941. The patent, entitled “Methods of Treating Autoimmune Disease via CTLA4-Ig,” covers meth- ods of using CTLA4-Ig to treat rheumatoid arthritis, as well as other therapeutic methods. The patent is in force until 2021. Repligen has exclusive rights to this patent from its owners, the University of Michigan and the U.S. Navy. Development Stage Products for Neuropsychiatric Disorders Secretin for MRI Secretin is a well-known hormone produced in the small intestine that regulates the function of the pancreas as part of the process of digestion. We are currently evaluating secretin for improvement of MRI imaging of the pancreas. Several reports published in the literature support the use of secretin with abdominal MRI imaging to improve visualization of pancreaticobiliary structures and to increase diagnostic sensitivity relative to unenhanced abdominal MRI. MRI technology images stationary water thus the use of secretin during MRI harnesses the natural biologic properties of secretin, which signals the release of water-rich fluids into the ducts of the pancreas. Improvement in the detection and delineation of normal and abnormal structures with MRI is attractive for patient care as it can obvi- ate the need for more risky invasive procedures. In June 2006, we initiated a Phase 2 clinical trial to evaluate the use of RG1068, synthetic human secre- tin, as an agent to improve the detection of structural abnormalities of the pancreatic ducts during MRI imaging of the pancreas. This was a multi-center, baseline controlled, single dose study in which 80 patients with a history of pancreatitis receive a secretin-enhanced MRI and an unenhanced MRI of the pancreas. In May 2007, we announced positive results from this Phase 2 clinical trial to evaluate the use of RG1068, synthetic human secretin, to improve the assessment of pancreatic duct structures by MRI. The study showed an improvement in sensi- tivity of detection of structural abnormalities of the pancreatic duct of approximately 20% with no loss in specificity, consistent with prior data and expectations. In addition, the study showed highly significant increases in the following three assess- ments: physician confidence in their ability to identify structural abnormalities, the number of pancreatic duct segments visualized and improve- ment in the overall quality of the MRI images. Detailed visual assessment of the pancreatic ducts and identification of structural abnormalities is impor- tant in the assessment, diagnosis and treatment of diseases such as acute and chronic pancreatitis. We believe these results establish the basis for dis- cussions with the FDA regarding a clinical plan to REPLIGEN CORPORATION BUSINESS (continued) receive marketing approval for secretin for MRI imag- ing of the pancreas. Uridine for Bipolar Depression Uridine is a biological compound essential for the synthesis of DNA and RNA, the basic hereditary material found in all cells, and numerous other fac- tors essential for cell metabolism. Uridine is syn- thesized by the power plant of the human cell known as the mitochondria. The rationale for uridine therapy in CNS disorders is supported by pre-clinical and clinical research. Researchers at McLean Hospital previously demonstrated that uridine is active in a well-validated animal model of depression. Recent reports indicate that certain genes that encode for mitochondrial proteins are significantly down- regulated in the brains of bipolar patients. This new insight suggests that the symptoms of bipolar dis- order may be linked to dysregulation of energy metabolism of the brain. Bipolar disorder, also known as manic depression, is marked by extreme changes in mood, energy and behavior in which a person can alternate between mania (highs) and depression (lows). Bipolar disor- der affects more than 2 million adults in the United States. Current drug therapy for bipolar disorder includes the use of lithium and anti-depressants. However, side effects are frequent and troublesome, and patients do not respond fully, leading to frequent recurrences of mania and depression. In March 2006, we initiated a Phase 2 clinical trial of RG2417, an oral formulation of uridine, in patients with bipolar depression. This Phase 2 study is a multi-center, dose escalating study in which 80 patients will receive either RG2417 or a placebo for six weeks. Patients will be evaluated for the safety and effectiveness of RG2417 on the symptoms of bipolar depression. This study is being conducted under a development agreement with the Stanley Medical Research Institute, under which Repligen will receive approximately $1,200,000 in funding. The Stanley Medical Research Institute is the largest nonprofit provider of funding for research on schizo- phrenia and bipolar disorder in the United States. We have completed patient enrollment in this study and we anticipate release of top line data later in 2007. Repligen previously completed a six-week Phase 1 clinical trial of a prodrug of uridine (RG2133) in patients with bipolar disorder or major depression. The results demonstrated that administration of RG2133 in this patient population appeared to be safe, did not induce mania, and provided early evi- dence of a clinical effect of the drug. The trial evalu- ated 19 patients and was carried out by investigators at McLean Hospital, the largest psychiatric clinical care, teaching and research affiliate of Harvard Medical School. Transcription Enhancers for Friedreich’s Ataxia Symptoms of Friedreich’s ataxia typically emerge between the ages of five and 15 and often progress to severe disability, incapacitation or loss of life in early adulthood. Friedreich’s ataxia is caused by a single gene defect that results in inadequate produc- tion of the protein frataxin. The protein frataxin appears to be essential for the proper functioning of the mitochondria, the power plant of both neural and muscle cells. Low levels of frataxin lead to degenera- tion of both the nerves controlling muscle move- ments in the arms and legs and the nerve tissue in the spinal cord. Approximately one in every 50,000 people in the United States has Friedreich’s ataxia. In April 2007, we announced that we entered into an exclusive commercial license with The Scripps Research Institute for intellectual property covering compounds which may have utility in treating Friedreich’s ataxia. Friedreich’s ataxia is an inherited neurodegenerative disease in which low levels of the protein frataxin result in progressive damage to the nervous system and loss of muscle function. Research in tissues derived from patients as well as in mice indicates that the licensed compounds increase production of the protein frataxin, which suggests potential utility of these compounds in slowing or stopping progression of the disease. There is currently no treatment for Friedreich’s ataxia. Data supporting the ability of the licensed com- pounds to increase production of the protein frataxin was published in Nature Chemical Biology (August 20, 2006 ). This research was lead by Dr. Joel Gottesfeld, professor of molecular biology at The Scripps Research Institute, and supported in part by the Friedreich’s Ataxia Research Alliance (FARA). These compounds are the only ones to date that have demonstrated utility in increasing both the level of the frataxin protein in tissue samples from patients with Friedreich’s ataxia as well as frataxin gene activ- ity in animal models. Preliminary data also suggests that these compounds may have utility in treating other disorders such as Spinal Muscular Atrophy and Huntington’s disease. Repligen’s Business Strategy Our business strategy is to maintain full commercial rights to our product candidates through “proof of principle” clinical studies after which we may seek corporate partners for further development and marketing. We partially fund the development of our proprietary therapeutic product candidates with the profits derived from the sales of our commercial products. This will enable us to independently advance our product candidates while reducing our financial risks. 2007 ANNUAL REPORT F.5 F.6 BUSINESS (continued) Sales and Marketing We sell our Protein A products primarily through value-added resellers including GEHC and Applied Biosystems, Inc., as well as through distributors in certain foreign markets. We market SecreFlo® directly to gastroenterologists in the United States. Significant Customers and Geographic Reporting Customers for our Protein A products include chro- matography companies, diagnostics companies, biopharmaceutical companies and laborator y researchers. During fiscal years 2007 and 2006, the customers that accounted for more than 10% of our total revenue were GEHC and Applied Biosystems, Inc. During fiscal year 2005, the customers that accounted for more than 10% of our total revenue were GEHC, Applied Biosystems, Inc. and Cardinal Healthcare. Of our fiscal 2007 product revenue, 47% is attrib- utable to U.S. customers and 53% is attributable to foreign customers, of which 72% is attributable to two customers. Of our fiscal 2006 revenue, 48% is attributable to U.S. customers and 52% is attribut- able to foreign customers, of which 75% is attrib- utable to two customers. Of our fiscal 2005 revenue, 43% is attributable to U.S. customers and 56% is attributable to foreign customers, of which 77% is attributable to three customers. Employees As of June 6, 2007, we had 45 employees. Of those employees, 32 were engaged in research, develop- ment and manufacturing and 13 in administrative and marketing functions. Sixteen of our employees hold doctorates or other advanced degrees. Each of our employees has signed a confidentiality agreement. None of our employees are covered by collective bargaining agreements. Patents, Licenses and Proprietary Rights Our policy is to seek patent protection for our thera- peutic product candidates. We pursue patent protec- tion in the United States and file corresponding patent applications in relevant foreign jurisdictions. We believe that patents are an important element in the protection of our competitive and proprietary position, but other elements, including trade secrets, orphan drug status and know-how, may also be important. We own or have exclusive rights to more than 15 issued U.S. patents and corresponding for- eign equivalents. The terms of such patents expire at various times between 2009 and 2021. No patent material to our business expires before 2009. In addi- tion, we have rights to more than 20 U.S. pending patent applications and corresponding foreign appli- cations. The invalidation of key patents owned or licensed by us or the failure of patents to issue on pending patent applications could create increased competition, with potential adverse effects on our business prospects. For each of our license agree- ments where we license the rights to patents or pat- ent applications, the license will terminate on the day that the last to expire patent covered by each such license agreement expires. We also rely upon trade secret protection for our confidential and proprietary information. Our policy is to require each of our employees, consultants, business partners and significant scientific collabo- rators to execute confidentiality agreements upon the commencement of an employment, consulting or business relationship with us. These agreements generally provide that all confidential information developed or made known to the individual during the course of the individual’s relationship with us is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees and consultants, the agreements gen- erally provide that all inventions conceived by the individual in the course of rendering services to Repligen shall be our exclusive property. CTLA4-Ig We are the exclusive licensee of all CTL A4 -Ig patent rights owned by the University of Michigan (“Michigan”). In February 2004, U.S. Patent No. 6,685,941 (“the ‘941 patent”) issued, to which we own the exclusive rights through license agreements with Michigan and the U.S. Navy. The ‘941 patent has claims that cover the use of CTLA4-Ig to treat rheumatoid arthritis, multiple sclerosis and certain other autoimmune disorders and is assigned to the University of Michigan and the U.S. Navy. The ‘941 patent expires in 2021. Uridine In November 2000 and December 2000, Repligen entered into two license agreements (the “UCSD Uridine License Agreements”) with the University of California, San Diego (“UCSD”) for certain patent applications pertaining to the use of uridine and uri- dine derivatives for the treatment of mitochondrial disease and purine autism. 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 UCSD Uridine License Agree- ment relating to treatment of mitochondrial disease entered into between Repligen and the UCSD. Pro- Neuron, Inc. subsequently amended the complaint to include the UCSD Uridine License Agreement related to purine autism and claims for misappropria- tion of trade secrets. REPLIGEN CORPORATION BUSINESS (continued) In June 2003, Repligen agreed to restructure the UCSD License Agreements to exclude the field of acylated pyrimidines, including triacetyluridine. In April 2004, a U.S. patent was issued to Repligen and University of California, which claims methods of treating certain developmental disorders, includ- ing certain forms of autism, with uridine compo- sitions which expires in October 2020. Foreign equivalents of this patent are pending. A patent with similar claims has recently issued in Australia. Protein A We own a U.S. patent covering recombinant Protein A, which expires in September 2009, as well as sig- nificant know-how in the manufacture of high-purity Protein A. We also own a U.S. patent covering modi- fied forms of Protein A, which was non-exclusively licensed to Amersham Biosciences (now GEHC) in 1998 as part of a ten-year agreement, which was amended and extended in 2005 until 2010, covering the supply of Protein A to GEHC. In addition to its utility in monoclonal antibody manu- facturing, Protein A may also be useful in human therapy based on its activity as a B- cell toxin. Repligen has exclusively licensed rights from UCSD to a U.S. patent application which claims a variety of potential therapeutic uses of Protein A. Foreign equiv- alents of this patent application are also pending. Legal Proceedings ImClone Systems In July 2006, Repligen reported that the United States District Court for the District of Massachu- setts issued a Summary Judgment ruling in favor of Repligen and the Massachusetts Institute of Technology (“MIT”) and rejected ImClone Systems Incorporated’s (“ImClone”) defense of patent exhaus- tion in the ongoing patent infringement lawsuit over the production of Erbitux ®. In their complaint, Repligen and MIT allege that ImClone’s production of Erbitux® infringes U.S. patent 4,663,281 which covers certain genetic elements that increase pro- tein production in a mammalian cell. This patent is assigned to MIT and exclusively licensed to Repligen. ImClone had previously reported that it produced approximately $1 billion worth of Erbitux® prior to the expiration of the patent-in-suit in 2004 and that Bristol-Myers Squibb, ImClone’s commercial partner, has paid ImClone $900 million in up-front and mile- stone payments as well as a 39% royalty on the net sales of Erbitux® in the United States. Repligen and MIT allege that the cell line that ImClone uses to produce Erbitux® employs key tech- nology that is claimed in the patent-in-suit. Repligen and MIT also allege that the cell line was created under contract for the National Cancer Institute (“NCI”) by a predecessor to Repligen and subse- quently transferred from the NCI to ImClone for use in research and development only. In its ruling, the Court found that neither the transfer to the NCI by Repligen’s predecessor nor the subsequent transfer to ImClone by the NCI exhausted the proprietary rights of Repligen and MIT. The Court’s ruling has eliminated these arguments as a potential defense for ImClone at trial. Repligen and MIT intend to seek damages adequate to compensate Repligen and MIT for ImClone’s unlicensed use of the patented tech- nology and a multiplier of any such damage award based on ImClone’s willful infringement. The out- come of this case is undeterminable at this time. Bristol-Myers Squibb Company (“Bristol”) In January 2006, Repligen Corporation and the University of Michigan jointly filed a complaint against Bristol in the United States District Court for the Eastern District of Texas for infringement of U.S. Patent No. 6,685,941 (“the ‘941 patent”) for the commercial sale of Orencia®. The ‘941 patent, entitled “Methods of Treating Autoimmune Disease via CTLA4-Ig,” covers methods of using CTLA4-Ig to treat rheumatoid arthritis, as well as other thera- peutic methods. Repligen has exclusive rights to this patent from its owners, the University of Michigan and the U.S. Navy. In February 2006, Bristol answered the complaint and counterclaimed seeking a declara- tory judgment that the ‘941 patent is invalid and unenforceable and that Bristol does not infringe the patent. On November 16, 2006, the Court held a scheduling conference. Jury selection for the trial in this matter is scheduled to commence on April 7, 2008. The outcome of this case is undeterminable at this time. Other From time to time, we may be subject to other legal proceedings and claims in the ordinary course of business. We are not currently aware of any such proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or results of operations. F.7 2007 ANNUAL REPORT F.8 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This annual report contains forward-looking state- ments which are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. The forward-looking statements in this annual report do not constitute guarantees of future performance. Investors are cautioned that statements in this annual report that are not strictly historical statements, including, without limitation, statements regarding current or future financial performance, potential impairment of future earnings, manage- ment’s strategy, plans and objectives for future oper- ations and product candidate acquisition, clinical trials and results, litigation strategy, product research and development, research and development expendi- tures, intellectual property, development and manu- facturing 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, the risks identified under the caption “Risk Factors” and other risks detailed in our Annual Report on Form 10-K and our other filings with the Securities and Exchange Commission. We assume no obligation to update any forward-looking information contained in this annual report. Overview We are a biopharmaceutical company focused on the development of novel therapeutics for diseases that affect the central nervous system. A number of drug development programs are currently being conducted to evaluate our drug candidates in dis- eases such as bipolar disorder and neurodegenera- tion. In addition, we sell two commercial products, Protein A for monoclonal antibody purification and SecreFlo® for assessment of pancreatic disorders. In fiscal 2007, we experienced growth in sales and profits from our commercial products business. Our business strategy is to deploy the profits from our current commercial products and any revenue that we may receive from our patents to enable us to invest in the development of our product candidates in the treatment area of neurological diseases while reducing our financial risk. Critical Accounting Policies and Estimates While our significant accounting polices are more fully described in notes to our financial statements, we have identified the policies and estimates below as critical to our business operations and the under- standing of our results of operations. The impact and any associated risks related to these policies on our business operations is discussed throughout “Management’s Discussion and Analysis of Finan- cial Condition” and “Results of Operations” where such policies affect our reported and expected finan- cial results. Revenue Recognition We apply Staff Accounting Bulletin No. 104, “Rev- enue Recognition” (“SAB No. 104”) to our revenue arrangements. We generate product revenues from the sale of our Protein A products to customers in the pharmaceutical and process chromatography industries and from the sale of SecreFlo® to hospital- based gastroenterologists. In accordance with SAB No. 104, we recognize revenue related to product sales upon delivery of the product to the customer as long as there is persuasive evidence of an arrange- ment, the sales price is fixed or determinable and collection of the related receivable is reasonably assured. Determination of whether these criteria have been met are based on management’s judg- ments primarily regarding the fixed nature of the fee charged for product delivered, and the collect- ibility of those fees. We have a few longstanding customers who comprise the majority of our revenue and have excellent payment history. We have had no significant write-offs of uncollectible invoices in the periods presented. Should changes in condi- tions cause management to determine that these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected. At the time of sale, we also evaluate the need to accrue for warranty and sales returns. The supply agreements we have with our customers and related purchase orders identify the terms and conditions of each sale and the price of the goods ordered. Due to the nature of our sales arrangements, inventory produced for sale is tested for quality specifications prior to shipment. Since the product is manufactured to order and in compliance with required specifica- tions prior to shipment, the likelihood of sales return, warranty or other issues is largely diminished. Sales returns and warranty issues are infrequent and have had nominal impact on our financial statements his- torically. Should changes in conditions cause man- agement to determine that warranty, returns or other sale-related reserves are necessary for certain future transactions, revenue recognized for any reporting period could be adversely affected. During the fiscal years ended March 31, 2007 and March 31, 2006, we recognized $ 825,000 and $310,000, respectively, of revenue from a sponsored research and development project under an agree- ment with the Stanley Medical Research Institute (“SMRI”). Research revenue is recognized on a cost plus fixed-fee basis when the expense has been REPLIGEN CORPORATION MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) incurred and services have been performed. Deter- mination of which costs incurred qualify for reim- bursement under the terms of our contractual agreement and the timing of when such costs were incurred involves the judgment of manage- ment. Our calculations are based upon the agreed- upon terms as stated in our arrangement. However, should our estimated calculations change or be chal- lenged by SMRI, research revenue may be adjusted in subsequent periods. Our calculations have not historically changed or been challenged and we do not anticipate any subsequent change in our rev- enue related to this sponsored research and develop- ment project. Additionally, during fiscal years 2007 and 2006, the Company earned and recognized approximately $175,000 and $72,000, respectively, in royalty reve- nue from ChiRhoClin. Revenues earned from ChiRhoClin royalties are recorded in the periods when they are earned based on royalty reports sent by ChiRhoClin to the Company. There have been no material changes to our initial estimates related to revenue recognition in any periods presented in the accompanying financial statements. Inventories Inventories relate to our Protein A business. We value inventory at cost or, if lower, fair market value. We determine cost using the first-in, first-out method. We review our inventories at least quarterly and record a provision for excess and obsolete inven- tory based on our estimates of expected sales volume, production capacity and expiration dates of raw materials, work-in-process and finished goods. Expected sales volumes are determined based on supply forecasts provided by our key customers for the next three to twelve months. We write down inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realiz- able value, and inventory in excess of expected requirements to cost of goods sold. Manufacturing of Protein A finished goods is done to order and tested for quality specifications prior to shipment. A change in the estimated timing or amount of demand for our products could result in additional provisions for excess inventory quantities on hand. Any significant unanticipated changes in demand or unexpected quality failures could have a significant impact on the value of our inventory and reported operating results. During all periods presented in the accompanying financial statements, there has been no material adjustments related to a revised estimate of inventory valuations. Accrued Liabilities We prepare our financial statements in accordance with accounting principles generally accepted in the United States. These principles require that we esti- mate accrued liabilities. This process involves iden- tifying services, which have been performed on our behalf, and estimating the level of service performed and the associated cost incurred for such service as of each balance sheet date. Examples of esti- mated accrued expenses include: 1) Fees paid to our contract manufacturers in conjunction with the production of clinical materials. These expenses are normally determined through a contract or purchase order issued by the Company; 2) Service fees paid to organizations for their performance in conducting our clinical trials. These expenses are determined by contracts in place for those services and com- munications with project managers on costs which have been incurred as of each reporting date; and 3) Professional and consulting fees incurred with law firms, audit and accounting service providers and other third-party consultants. These expenses are determined by either requesting those service pro- viders to estimate unbilled services at each reporting date for services incurred, or tracking costs incurred by service providers under fixed-fee arrangements. We have processes in place to estimate the appro- priate amounts to record for accrued liabilities, which principally involve the applicable personnel reviewing the services provided. In the event that we do not identify certain costs which have begun to be incurred or we under- or over-estimate the level of services performed or the costs of such services, our reported expenses for that period may be too low or too high. The date on which certain services commence, the level of services performed on or before a given date, and the cost of such services are often judgmental. We make these judgments based upon the facts and circumstances known to us at the date of the financial statements. A change in the estimated cost or volume of services provided could result in additional accrued liabilities. Any significant unanticipated changes in such esti- mates could have a significant impact on our accrued liabilities and reported operating results. There has been no material adjustments to our accrued liabilities in any of the periods presented in the accompanying financial statements. Stock-Based Compensation Effective April 1, 2006, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123R, “Share-Based Payment—An Amendment of FASB Statements No. 123 and 95,” or SFAS No. 123R, using the modified prospective transition method. Under this transition 2007 ANNUAL REPORT F.9 F.10 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) method, compensation cost recognized in the state- ment of operations for the year ended March 31, 2007 includes: (a) compensation cost for all share- based payments granted prior to, but not yet vested as of April 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123 and (b) compensation cost for all share-based payments granted, modified or settled subsequent to April 1, 2006, based on the grant-date fair value estimated in accordance with the provi- sions of SFAS No. 123R. In accordance with the modified prospective transition method, results for prior periods have not been restated. Effective with the adoption of SFAS No. 123R, we have elected to use the Black-Scholes option-pricing model to calculate the fair value of share-based awards on the grant date. The expected term of options granted represents the period of time for which the options are expected to be outstanding and is derived from our historical stock option exercise experience and option expira- tion data. For option grants made subsequent to the adoption of SFAS No. 123R, the expected life of stock options granted is based on the simplified method allowable under SAB No. 107. Accordingly, the expected term is presumed to be the midpoint between the vesting date and the end of the con- tractual term. In addition, for purposes of estimating the expected term, we have aggregated all individual option awards into one group as we do not expect substantial differences in exercise behavior among its employees. The expected volatility is a measure of the amount by which our stock price is expected to fluctuate during the expected term of options granted. We determined the expected volatility solely based upon the historical volatility of our Common Stock over a period commensurate with the option’s expected term. We do not believe that the future volatility of our Common Stock over an option’s expected term is likely to differ significantly from the past. The risk-free interest rate is the implied yield available on U.S. Treasury zero-coupon issues with a remaining term equal to the option’s expected term on the grant date. We have never declared or paid any cash dividends on any of our capital stock and do not expect to do so in the foreseeable future. Accordingly, we use an expected dividend yield of zero to calculate the grant-date fair value of a stock option. Forfeitures represent only the unvested portion of a surrendered option. SFAS No. 123R requires for- feitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Prior to the adoption of SFAS No. 123R, we accounted for for- feitures upon occurrence as permitted under SFAS No. 123. Based on an analysis of historical data, we have calculated an 8% annual forfeiture rate for non-director-level employees, a 3% annual forfeiture rate for director-level employees, and a 0% forfeiture rate for non-employee members of the Board of Directors, which we believe is a reasonable assump- tion to estimate forfeitures. However, the estimation of forfeitures requires significant judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. Prior to April 1, 2006, we applied the pro forma dis- closure requirements under SFAS No. 123 and accounted for our stock-based employee compensa- tion plans using the intrinsic value method under the recognition and measurement provisions of Account- ing Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB No. 25”) and related interpretations. Accordingly, no stock-based employee compensation cost was recognized in the statement of operations for the year ended March 31, 2006, as all stock options granted under our existing stock plans had an exercise price equal to the market value of the underlying Common Stock on the date of grant. For the year ended March 31, 2007, we recorded stock-based compensation expense of approximately $ 837,000 for stock options granted under the Amended and Restated 2001 Repligen Corporation Stock Plan. Basic and diluted earnings per share amounts for the year ended March 31, 2007 were decreased by $0.03, as a result of the adoption of SFAS No. 123R. As of March 31, 2007, there was $1,275,000 of total unrecognized compensation cost related to unvested share-based awards. This cost is expected to be recognized over a weighted average remaining requi- site service period of 2.86 years. The Company expects approximately 671,000 of unvested out- standing options to vest over the next five years. We recognize compensation expense on a straight- line basis over the requisite service period based upon options that are ultimately expected to vest, and accordingly, such compensation expense has been adjusted by an amount of estimated forfeitures. Results of Operations The following discussion of the financial condition and results of operations should be read in conjunc- tion with the accompanying financial statements and the related footnotes thereto. REPLIGEN CORPORATION MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Revenues: Total revenues for fiscal 2007, 2006 and 2005 were $14,074,000, $12,911,000 and $9,360,000. Revenues for the years ending March 31, 2007, 2006 and 2005 were primarily comprised of sales of our commercial products, Protein A and SecreFlo®. During the fiscal year ended March 31, 2007, 2006 and 2005, sales of our commercial products were: Protein A SecreFlo® Other product revenue Product revenue Year ended March 31 % Change 2007 2006 2005 2007 vs. 2006 2006 vs. 2005 (In thousands, except percentages) $ 11,127 1,947 — $ 10,540 1,989 — $ 7,134 2,189 37 6% (2)% $ 13,074 $ 12,529 $ 9,360 4% 48% (9)% 34% Substantially all of our products based on recombi- nant Protein A are sold to customers who incorpo- rate our manufactured products into their proprietary antibody purification systems to be sold directly to the pharmaceutical industry. Monoclonal antibodies are a well-established class of drug with applications in rheumatoid arthritis, asthma, Crohn’s disease and a variety of cancers. Sales of Protein A are therefore impacted by the timing of large-scale production orders and on the regulatory approvals for such antibodies, which may result in significant quarterly fluctuations. During fiscal 2007, Protein A sales increased by $587,000 or 6% over fiscal 2006. We shipped 13% less volume of Protein A in fiscal 2007 compared to fiscal 2006. The decrease in volume, however, did not reduce revenue compared to fiscal 2006, as the mix of products sold had more favorable pricing resulting in a 19% positive impact on total revenue. The Company sells different Protein A products at different price points. The mix of products sold var- ies and impacts the fluctuations in total sales reve- nue from year to year. During fiscal 2006, Protein A sales increased by $3,406,000 or 48%, primarily as a result of a rise in the demand for our Protein A products. The increase in sales volume of Protein A resulted in an increase in revenues of 49%. This increase was slightly off- set by a decrease in the total sales price of those products, which had an unfavorable impact of 1% on total revenues. We anticipate that sales of Protein A will grow in the future and will continue to be subject to quar- terly fluctuations due to timing of large-scale produc- tion orders. Sales of SecreFlo® decreased $42,000 or 2% in fis- cal 2007 primarily as a result of direct competition with ChiRhoClin, our sole supplier of SecreFlo®, and reduced sales and marketing efforts. Decreases in sales volume impacted sales by 1% of the prior year’s total. To remain competitive with ChiRhoClin, we reduced sales prices, which resulted in an unfa- vorable impact of 1% on SecreFlo® revenues. Sales of SecreFlo® decreased $200,000 or 9% in fiscal 2006 primarily as a result of direct competition with our sole supplier of SecreFlo®, the reduction of sales price to remain competitive and as a result of a reduction in sales and marketing efforts. Compe- tition with our sole supplier of SecreFlo® decreased the volume of SecreFlo® vials sold, unfavorably impacting revenue by 3%. To remain competitive, we reduced sales prices, which caused an unfavor- able impact of 6% on SecreFlo® revenues. The settlement in fiscal 2005 with our sole supplier of SecreFlo® provides for a certain amount of vials of product that we can ultimately ship. The last ship- ment of SecreFlo® to the Company from ChiRhoClin should be in late calendar year 2007 and is expected to allow us to fill sales orders into fiscal year 2009. We expect SecreFlo® revenues will decline by one third in fiscal 2008 as we continue to reduce sales and marketing efforts and focus our sales efforts on key customers. During the fiscal years 2007 and 2006, we recog- nized $825,000 and $310,000, respectively, of reve- nue from a sponsored research and development project under an agreement with the Stanley Medical Research Institute. Research revenue is recognized for costs plus fixed-fee contracts as costs are incurred. Additionally, during fiscal years 2007 and 2006, we earned and recognized approximately $175,000 and $72,000, respectively, in royalty reve- nue from ChiRhoClin. We expect that total research and license revenues will decline moderately in fis- cal 2008. F.11 2007 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Costs and Operating Expenses: Total costs and operating expenses for fiscal 2007, 2006 and 2005 were approximately $15,899,000, $14,131,000 and $13,522,000, respectively. Costs and operating expenses: Cost of product revenue Research and development Selling, general and administrative Total operating expenses Year ended March 31 % Change 2007 2006 2005 2007 vs. 2006 2006 vs. 2005 $ 3,615 5,924 6,360 $ 3,551 5,163 5,417 $ 3,888 5,037 4,597 $ 15,899 $ 14,131 $ 13,522 2% 15% 17% 13% (9)% 3% 18% 5% The increase in cost of product revenue of $64,000 or 2% in fiscal 2007 is attributable to several factors. These include an increase of $163,000 in consulting costs and a $128,000 increase in occupancy and depreciation costs. Consulting, occupancy and depre- ciation costs increased due to the costs associated with implementation of our fermentation facility in fiscal 2007, as well as spending to improve our qual- ity and redundancy systems to meet customer expectations. Additionally, we incurred $26,000 in stock-based compensation expense pursuant to the adoption of SFAS No. 123R and had an increase in labor costs of $147,000 compared to fiscal 2006. These increases were offset by a decrease in Protein A material costs of $267,000 related to lower vol- ume of Protein A production in fiscal 2007 compared to fiscal 2006 and lower costs of $39,000 related to SecreFlo® sales. The decrease in cost of product revenue of $337,000 or 9% in fiscal 2006 is attributable to a decrease in royalty and amortization fees of $1,236,000 associ- ated with SecreFlo®, partially offset by an increase of $688,000 in direct materials and increased person- nel costs of $189,000. This reduction in SecreFlo® related expenses is due to the settlement agreement in May of 2005 with ChiRhoClin. The increase in direct material and personnel costs is a result of growth in production volume and a small increase in the number of employees in the manufacturing department to support the 49% increase in volume of Protein A. Research and development expenses for fiscal 2007, 2006 and 2005 were approximately $ 5,924,000 $5,163,000 and $5,037,000, respectively. Research and development costs primarily include costs of internal personnel, external research collaborations, clinical trials and the costs associated with the man- ufacturing and testing of clinical materials. We cur- rently have ongoing research and development programs that support our product candidates of secretin and uridine. In addition, we are involved with a number of early stage programs that may or may not be further developed. Due to the small size of the Company and the fact that these various programs share personnel and fixed costs such as facility costs, depreciation, and supplies, we do not track our expenses by program. Each of our research and development programs is subject to risks and uncertainties, including the requirement to seek regulatory approvals that are outside of our control. For example, our clinical trials may be subject to delays based on our inability to enroll patients at the rate that we expect to meet the schedule for our planned clinical trials. Moreover, the product candidates identified in these research programs, particularly in our early stage programs, must overcome significant technological, manufac- turing and marketing challenges before they can be successfully commercialized. For example, results from our preclinical animal models may not be repli- cated in our clinical trials with humans. As a result of these risks and uncertainties, we are unable to predict with any certainty the period in which mate- rial net cash inflows from such projects could be expected to commence or the completion date of these programs. These risks and uncertainties also prevent us from estimating with any certainty the specific timing and future costs of our research and development pro- grams, although historical trends within the industry suggest that expenses tend to increase in later stages of development. Collaborations with com- mercial vendors and academic researchers accounted for 40%, 36% and 37% of our research and develop- ment expenses in the fiscal years ended March 31, 2007, 2006 and 2005, respectively. The outsourcing of such services provides us flexibility to discontinue or increase spending depending on the success of our research and development programs. F.12 REPLIGEN CORPORATION MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Research and development expenses increased by $761,000 or 15% during fiscal 2007. This increase is largely attributable to higher clinical trial expenses of $959,000, as the Company enrolled the majority of the patients in our two clinical trial programs for Uridine for bipolar disorder and secretin for diag- nostic imaging. Additionally, there were increased personnel expenses of $66,000 due to slightly higher headcount and the Company incurred stock-based compensation expense pursuant to the adoption of SFAS No. 123R in fiscal 2007 of $229,000. These increases were offset by reductions in external research expenses of $465,000. This was due to a reduction in activities related to secretin drug manu- facturing compared to fiscal 2006. Research and development expenses increased by $126,000 or 3% during fiscal 2006. This increase is largely attributable to higher clinical trial expenses of $192,000 as the Company had two clinical trial pro- grams in fiscal 2006 for Uridine for bipolar disorder and secretin for diagnostic imaging that exceeded the clinical trial programs in fiscal 2005 which pri- marily consisted of the secretin for schizophrenia trial. There were increased personnel expenses of $124,000 due to the addition of one clinical staff per- son to support the increase in clinical trials and increased license expenses of $59,000 due to a new license with another company for research materials for future clinical development. These increased expenses were offset by decreased expenses asso- ciated with our external research of $222,000 due to decreased non-recurring pharmacology studies on two of our research compounds. Clinical material expenses were relatively unchanged from fiscal 2005 to fiscal 2006. Future research and development expenses are dependent on a number of variables, including the cost and design of clinical trials and external costs such as manufacturing of clinical materials. We expect our research and development expenses in fiscal 2008 to increase due to clinical trial expenses as the Company continues studies for secretin for diagnostic imaging, continues drug manufacturing activities for secretin and begins the Friedreich’s ataxia research and development program which was recently licensed by the Company. Additionally, there may be further increases in expenses if we acquire additional product candidates. Selling, general and administrative expenses (“SG&A”) include the associated costs with selling our com- mercial products and costs required to support our research and development efforts including legal, accounting, patent, shareholder services and other administrative functions. In addition, SG&A expenses have historically included costs associated with vari- ous litigation matters. During fiscal 2007, SG&A costs increased by approx- imately $943,000 or 17%. This increase was mainly the result of the stock-based compensation expense recorded pursuant to the adoption of SFAS No. 123R of $582,000 and personnel expenses which increased by $287,000 due to compensation and benefit increases. Investor relations expenses also increased $78,000 due to expanded outreach to the investment community. Legal expenses were consistent with fiscal 2006 as we continue to pros- ecute patent infringement lawsuits against Bristol and ImClone. During fiscal 2006, SG&A costs increased by approx- imately $820,000 or 18%. This increase was partly the result of increased personnel expenses of $291,000 due to the addition of two senior manag- ers to support our growing business. Additionally, professional expenses increased $271,000 related to recruiting expenses for the new senior manage- ment and increased external investor relations con- sulting for the Company to expand awareness in the investor community. Legal expenses increased by $176,000 due to the Company filing suit against Bristol for patent infringement and continued expenses supporting the patent infringement suit against ImClone. We expect SG&A expenses to increase in fiscal 2008 due to anticipated increases in litigation expenses for the Bristol and ImClone cases com- bined with higher headcount and the related person- nel expenses. Investment Income: Investment income includes income earned on invested cash balances. Invest- ment income for fiscal 2007, 2006 and 2005 was approximately $948,000, $750,000 and $428,000, respectively. The increase of $198,000 or 21% is attributable to higher interest rates. The increase of $322,000 or 75% in fiscal 2006 is attributable to higher interest rates compared to fiscal 2005. We expect interest income to vary based on changes in the amount of funds invested and fluctuation of interest rates. Other Income: During the year ended March 31, 2006, Repligen entered into a Settlement Agree- ment with ChiRhoClin, in full settlement of their arbitration proceedings. As a result of the settle- ment, we determined that we were not required to pay approximately $1,170,000 of previously accrued but unremitted royalties to ChiRhoClin related to SecreFlo ® sales from February 2004 to March 2005. This amount, which was accrued at March 31, 2005, was reversed at the time of settlement and is recorded as other income in the fiscal year ended March 31, 2006. 2007 ANNUAL REPORT F.13 F.14 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Liquidity and Capital Resources We have financed our operations primarily through sales of equity securities and revenues derived from product sales and grants. Our revenue for the fore- seeable future will be limited to our product revenue related to Protein A and SecreFlo®. Revenues derived from the sales of SecreFlo™ vials are expected only through calendar year 2009. Given the uncertainties related to pharmaceutical product development, we are currently unable to reliably estimate when, if ever, our therapeutic product candidates or our pat- ents will generate revenue and cash flows. At March 31, 2007, we had cash and marketable securities of $22,627,000 compared to $23,408,000 at March 31, 2006. Deposits for leased office space of $200,000 is classified as restricted cash and is not included in cash and marketable securities total for either 2007 or 2006. Cash Flows: Cash provided by (used in) Operating activities Investing activities Financing activities Operating Activities: In fiscal 2007, our operating activities provided cash of $405,000 which reflects a net loss of approximately $889,000 which includes non-cash charges totaling approximately $1,376,000 including depreciation, amortization and stock-based compensation charges. The remaining cash flow from operations resulted from favorable changes in various working capital accounts. In fiscal 2006, our operating activities provided cash of $415,000 as a result of our net profit of $697,000 and non-cash charges such as depreciation, amor- tization and stock compensation charges. Sources of cash included a decrease in accounts receivable of approximately $176,000 due to improved cash collections and a reduction in prepaid expenses of approximately $134,000. Uses of cash included an increase in inventories of approximately $832,000 which was a result of purchases related to a man- ufacturing process conversion and a decrease in accrued liabilities of approximately $328,000. Year ended March 31, 2007 Increase/ (Decrease) 2006 Increase/ (Decrease) 2005 $ 405 1,775 118 $ (10) 311 (215) (In thousands) $ 415 1,464 333 $1,528 1,119 307 $ (1,113) 345 26 Investing Activities: In fiscal 2007, investing activi- ties included capital spending of $1,327,000 mainly related to the new fermentation facility in Waltham, Massachusetts. In fiscal 2006, our purchases of prop- erty, plant and equipment were $877,000 of which $142,000 was financed through capital leases. Pur- chases and redemptions of marketable securities account for the remainder of the fluctuation during fiscal 2007 and fiscal 2006. We generally place our marketable security investments in high quality credit instruments as specified in our investment policy guidelines. Financing Activities: In fiscal 2007, exercises of stock options provided cash proceeds of $158,000. In fiscal 2006, exercises of stock options provided cash proceeds of $340,000. Off-Balance Sheet Arrangements: We do not have any special purpose entities or off-balance sheet financing arrangements. Contractual Obligations: As of March 31, 2007, we had the following fixed obligations and commitments: Operating lease obligations Capital lease obligations (1) Purchase obligations (2) Contractual obligations(3) Total Payments Due By Period Total Less than 1 Year 1–3 Years 3–5 Years More than 5 Years $ 2,211 125 298 324 $ 2,958 (In thousands) $ 928 85 — 104 $834 — — 96 $ 1,117 $930 $449 40 298 99 $886 $ — — — 25 $25 (1) The above amounts represent principal payments only while principal and interest are payable through a fixed monthly payment of approximately $4,000 and a fixed annual payment of $52,000. (2) This amount represents minimum commitments due under a third-party manufacturing agreement. (3) These amounts include payments for license, supply and consulting agreements. REPLIGEN CORPORATION MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Capital Requirements: Our future capital require- ments will depend on many factors, including the following: • the success of our clinical studies; • the scope of and progress made in our research and development activities; • our ability to acquire additional product candidates; • the success of any proposed financing efforts; and • the ability to sustain sales and profits of our com- mercial products. Absent an acquisition of another product candidate, we believe our current cash balances are adequate to meet our cash needs for at least the next twenty- four months. We expect to incur an increased level of expense in fiscal 2008 compared to those incurred in fiscal 2007. This is due to anticipated increases in clinical study expenses and legal fees for litigation in process currently, as well as increased personnel expenses. Our future capital requirements include, but are not limited to, continued investment in our research and development programs, capital expen- ditures primarily associated with purchases of equip- ment and continued investment in our intellectual property portfolio. We plan to continue to invest in key research and development activities. We continue to seek to acquire such potential assets that may offer us the best opportunity to create value for our sharehold- ers. In order to acquire such assets, we may need to seek additional financing to fund these invest- ments. This may require the issuance or sale of addi- tional equity or debt securities. The sale of additional equity may result in additional dilution to our stock- holders. Should we need to secure additional financ- ing to acquire a product, fund future investment in research and development, or meet our future liquid- ity 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. Net Operating Loss Carryforwards: At March 31, 2007, we had net operating loss carryforwards of approximately $100,130,000 and research and development credit carryforwards of approximately $5,270,000 to reduce future federal income taxes, if any. The net operating loss and tax credit carry- forwards have expired and will continue to expire at various dates, beginning in fiscal year 2008, if not used. Net operating loss carryforwards and avail- able tax credits are subject to review and possible adjustment by the Internal Revenue Service and may be limited in the event of certain changes in the ownership interest of significant stockholders. We did not record a tax provision in the fiscal year 2007 statement of operations as we did not generate tax- able income. Effects of Inflation: Our assets are primarily mone- tary, consisting of cash, cash equivalents and mar- ketable securities. Because of their liquidity, these assets are not directly affected by inflation. Since we intend to retain and continue to use our equip- ment, furniture and fixtures and leasehold improve- ments, we believe that the incremental inflation related to replacement costs of such items will not materially affect our operations. However, the rate of inflation affects our expenses, such as those for employee compensation and contract services, which could increase our level of expenses and the rate at which we use our resources. Recent Accounting Pronouncements Accounting for Uncertainty in Income Taxes: In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109” (the “Interpretation”). The Interpretation clarifies the accounting for uncertainty in income taxes recog- nized in an enterprise’s financial statements in accord- ance with FASB Statement No. 109, “Accounting for Income Taxes.” The Interpretation prescribes a rec- ognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transi- tion. The Interpretation is effective for fiscal years beginning after December 15, 2006. The Company has not yet completed its evaluation of the Interpretation, but does not currently believe that adoption will have a material impact on its results of operations, financial position or cash flows. Fair Value Measurements: In September 2006, the FASB issued FASB Statement No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 establishes a common definition for fair value, cre- ates a framework for measuring fair value, and expands disclosure requirements about such fair value measurements. SFAS No. 157 is effective for our first quarter of 2008. Management does not cur- rently believe that adoption will have a material impact on its results of operations, financial position or cash flows. Fair Value Option for Financial Assets and Finan- cial Liabilities: In February 2007, the FASB issued FASB Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 provides companies with 2007 ANNUAL REPORT F.15 F.16 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) an option to report selected financial assets and liabilities at fair value. The objective of SFAS No. 159 is to reduce both complexity in accounting for finan- cial instruments and the volatility in earnings caused by measuring related assets and liabilities differ- ently. Generally accepted accounting principles have required different measurement attributes for dif- ferent assets and liabilities that can create artificial volatility in earnings. FASB has indicated it believes that SFAS No. 159 helps to mitigate this type of accounting-induced volatility by enabling companies to report related assets and liabilities at fair value, which would likely reduce the need for companies to comply with detailed rules for hedge accounting. SFAS No. 159 also establishes presentation and dis- closure requirements designed to facilitate compari- sons between companies that choose different measurement attributes for similar types of assets and liabilities. For example, SFAS No. 159 requires companies to provide additional information that will help investors and other users of financial state- ments to more easily understand the effect of the company’s choice to use fair value on its earnings. It also requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the bal- ance sheet. SFAS No. 159 does not eliminate disclo- sure requirements included in other accounting standards, including requirements for disclosures about fair value measurements included in FASB Statement No. 157, “Fair Value Measurements” (“SFAS No. 157”), and FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments” (“SFAS No. 107”). SFAS No. 159 is effective as of the beginning of a company’s first fis- cal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of the pre- vious fiscal year provided that the company makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of SFAS No. 157. The Company has not yet completed its evaluation of the Interpretation, but does not currently believe that adoption will have a material impact on its results of operations, financial position or cash flows. Quantitative and Qualitative Disclosures about Market Risk Interest Rate Risk: We have investments in com- mercial paper, U.S. Government and agency secu- rities 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 invest- ments in high quality credit instruments, as specified in our investment policy guidelines. A hypothetical 100 basis point decrease in interest rates would result in an approximate $55,000 decrease in the fair value of our investments as of March 31, 2007. However, the conservative nature of our investments mitigates our interest rate exposure, and our invest- ment policy limits the amount of our credit exposure to any one issue, issuer (with the exception of U.S. Treasury obligations) and type of instrument. We do not expect any material loss from our market- able security investments due to interest rate fluctu- ations and therefore believe that our potential interest rate exposure is limited. We intend to hold these investments to maturity, in accordance with our busi- ness plans. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information Our common stock is traded on the Nasdaq Global Market under the symbol “RGEN.” The following table sets forth for the periods indicated the high and low closing prices for the common stock as reported by Nasdaq. Fiscal Year 2007 Fiscal Year 2006 High Low High Low $3.82 $3.40 $3.41 $3.30 $2.58 $2.27 $2.70 $2.80 $2.45 $4.00 $4.00 $4.99 $1.67 $1.99 $2.80 $3.43 First Quarter Second Quarter Third Quarter Fourth Quarter Stockholders and Dividends As of June 1, 2007, there were approximately 790 stockholders of record of our common stock. We have not paid any dividends since our inception and do not intend to pay any dividends on our common stock in the foreseeable future. We anticipate that we will retain all earnings, if any, to support our operations and our proprietary drug development programs. Any future determination as to the payment of dividends will be at the sole discretion of our Board of Directors and will depend on our financial condition, results of operations, capital requirements and other factors our Board of Directors deems relevant. REPLIGEN CORPORATION 160 140 120 100 80 60 40 20 0 STOCK PRICE PERFORMANCE GRAPH The following graph compares the yearly percent- age change in the cumulative total stockholder return (change in stock price plus reinvested dividends) on Repligen’s common stock with the cumulative total return for the Nasdaq Stock Market Index (U.S.) (the “Nasdaq Composite Index”) and the Nasdaq Pharmaceutical Stock Index (the “Nasdaq Pharmaceutical Index”). The comparisons in the graph are required by the SEC and are not intended to fore- cast or be indicative of possible future performance of Repligen’s common stock. 100 124.50 80.93 71.19 108.56 109.31 129.50 119.86 106.60 80.78 98.47 98.64 136.19 110.83 84.24 45.32 $160 140 120 100 80 60 40 20 0 * Assumes $100 invested on March 31, 2002 in each of Repligen Corporation’s Common Stock, the securities comprising the Nasdaq Composite Index and the securities comprising the Nasdaq Pharmaceutical Index. 3/02 3/03 3/04 3/05 3/06 3/07 Repligen Corporation NASDAQ Composite NASDAQ Phamarceutical STATEMENTS OF OPERATIONS Revenue: Product revenue Other revenue Total revenue Operating expenses (1): Cost of product revenue Research and development Selling, general and administrative Total operating expenses Loss from operations Investment income Interest expense Other income Net income (loss) Basic and diluted (loss) earnings per share Weighted average shares outstanding: Basic Diluted (1) Includes non-cash stock-based compensation as follows: Cost of product revenue Research and development Selling, general and administrative See accompanying notes. 2007 ANNUAL REPORT Years ended March 31, F.17 2007 2006 2005 $ 13,073,894 1,000,345 $ 12,529,404 382,000 $ 9,360,309 — 14,074,239 12,911,404 9,360,309 3,614,837 5,924,439 6,360,292 3,550,861 5,163,098 5,417,339 3,887,802 5,036,766 4,597,085 15,899,568 13,521,653 14,131,298 $ (1,825,329) $ (1,219,894) $ (4,161,344) 427,770 — 750,000 750,156 (3,010) 1,169,608 947,547 (11,481) — $ $ (889,263) $ 696,860 $ (2,983,574) (0.03) $ 0.02 $ (0.10) 30,379,350 30,125,041 30,061,812 30,379,350 30,690,941 30,061,812 $ $ $ 25,655 228,597 582,280 $ $ $ 20,650 — $ $ — $ — 23,603 — BALANCE SHEETS Assets Current assets: Cash and cash equivalents Marketable securities Accounts receivable, less reserve of $10,000 for 2007 and 2006 Inventories Prepaid expenses and other current assets Total current assets Property, plant and equipment, at cost: Leasehold improvements Equipment Furniture and fixtures Less-accumulated depreciation and amortization Long-term marketable securities Restricted cash Total assets Liabilities and stockholders’ equity Current liabilities: Accounts payable Accrued liabilities F.18 Total current liabilities Long-term liabilities Total liabilities Commitments and contingencies Stockholders’ equity: Preferred stock, $.01 par value, 5,000,000 shares authorized, no shares issued or outstanding Common stock, $.01 par value authorized, 40,000,000 shares outstanding, 30,477,635 shares at March 31, 2007 and 30,377,635 shares at March 31, 2006 Additional paid-in capital Deferred compensation Accumulated deficit Total stockholders’ equity Total liabilities and stockholders’ equity See accompanying notes. As of March 31, 2007 2006 $ 7,726,505 14,900,840 1,143,694 1,514,571 445,415 $ 5,428,477 13,447,600 593,725 1,465,592 575,038 25,731,025 21,510,432 3,212,916 2,353,667 191,356 5,757,939 (2,613,081) 3,144,858 — 200,000 2,475,169 1,769,367 186,874 4,431,410 (2,074,049) 2,357,361 4,531,548 200,000 $ 29,075,883 $ 28,599,341 $ 1,161,504 2,175,739 3,337,243 200,342 3,537,585 $ 1,066,445 1,869,349 2,935,794 230,518 3,166,312 — — 304,776 182,916,856 — (157,683,334) 303,776 181,985,274 (61,950) (156,794,071) 25,538,298 25,433,029 $ 29,075,883 $ 28,599,341 REPLIGEN CORPORATION STATEMENTS OF CASH FLOWS Cash flows from operating activities: Net (loss) income: Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: Issuance of common stock for service Depreciation and amortization Stock-based compensation expense Loss on disposal of assets Bad debt reserve Changes in assets and liabilities: Accounts receivable Inventories Prepaid expenses and other current assets Accounts payable Accrued liabilities Long-term liabilities Net cash (used in) provided by operating activities Cash flows from investing activities: Purchases of marketable securities Redemptions of marketable securities Purchases of property, plant and equipment Years ended March 31, 2007 2006 2005 $ (889,263) $ 696,860 $ (2,983,574) — 539,032 836,532 — — (549,969) (48,979) 106,827 95,059 346,419 (30,176) 405,482 85,750 398,434 20,650 18,369 (5,000) 175,507 (832,278) 133,906 49,487 (327,805) 1,504 — 756,258 23,603 (20,000) — 228,017 246,067 (252,633) 302,667 577,203 9,787 415,385 (1,112,605) $(13,973,896) 17,075,000 (1,326,529) (11,383,595) 13,583,000 (735,495) (16,904,423) 17,301,991 (52,658) Net cash provided by investing activities 1,774,575 1,463,910 344,910 Cash flows from financing activities: Exercise of stock options Principal payments under capital lease obligation Net cash provided by financing activities 158,000 (40,029) 117,971 340,111 (7,609) 332,502 30,501 (4,802) 25,699 F.19 Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of period 2,298,028 $ 5,428,477 2,211,796 $ 3,216,681 (741,996) $ 3,958,677 Cash and cash equivalents, end of period $ 7,726,505 $ 5,428,477 $ 3,216,681 Supplemental disclosure of noncash activities: Purchase of Capital Lease Equipment Reclassification of Deferred Compensation Recording of Deferred Compensation Disposal of fully depreciated equipment See accompanying notes. $ $ $ $ — $ 133,261 $ 33,605 61,950 $ — $ — $ 82,600 — $ 109,339 $ $ — — 283,505 2007 ANNUAL REPORT STATEMENTS OF STOCKHOLDERS’ EQUITY Common Stock Number of Shares Amount Additional Paid-in Capital Deferred Compen- sation Accumulated Deficit Stockholders’ Equity Balance at March 31, 2004 30,036,085 $ 300,361 $ 181,394,602 $ (23,603) $ (154,507,357) $ 27,164,003 Exercise of stock options Compensation expense related to issuance of stock options Amortization of deferred compensation Net loss 58,350 583 29,918 — — — — 30,501 55,125 55,125 — 23,603 — — — (2,983,574) 23,603 (2,983,574) — — — — — — Balance at March 31, 2005 30,094,435 $ 300,944 $ 181,479,645 $ — $ (157,490,931) $ 24,289,658 Issuance of common stock for services Deferred compensation related to employee stock options Amortization of deferred compensation Exercise of stock options Net income 25,000 250 85,500 — 20,000 200 82,600 (82,600) — — — 238,200 — — 2,382 — — 20,650 — — 337,529 — — — 696,860 85,750 200 20,650 339,911 696,860 Balance at March 31, 2006 30,377,635 $ 303,776 $ 181,985,274 $ (61,950) $ (156,794,071) $ 25,433,029 Reclassification of deferred compensation Share-based compensa- tion expense Repurchase and retirement of treasury stock Exercise of stock options Net loss — — — — (10,000) 110,000 — (100) 1,100 — (61,950) 61,950 836,532 100 156,900 — — — — — — — — — (889,263) — 836,532 — 158,000 (889,263) Balance, March 31, 2007 30,477,635 $ 304,776 $ 182,916,856 $ — $ (157,683,334) $ 25,538,298 See accompanying notes. F.20 REPLIGEN CORPORATION NOTES TO FINANCIAL STATEMENTS 1. Organization and Nature of Business Repligen Corporation (“Repligen” or the “Company”) is a biopharmaceutical company focused on the development of novel therapeutics for the treatment of diseases of the central nervous system. A number of drug development programs are currently being conducted to evaluate the Company’s naturally occurring drug candidates in diseases such as bipo- lar disorder and neurodegeneration. In addition, Repligen sells two commercial products, Protein A for monoclonal antibody purification and SecreFlo® for assessment of pancreatic disorders. The Company’s business strategy is to deploy the profits from its commercial products and any reve- nue that it may receive from its patents to enable the Company to invest in the development of product candidates in the treatment area of neuropsychiatric diseases. The Company is subject to a number of risks typi- cally associated with companies in the biotechnol- ogy industry. Principally those risks are associated with the Company’s dependence on collaborative arrangements, development by the Company or its competitors of new technological innovations, dependence on key personnel, protection of proprie- tary technology, compliance with the U.S. Food and Drug Administration and other governmental regula- tions and approval requirements, as well as the abil- ity to grow the Company’s business and obtain adequate funding to finance this growth. 2. Summary of Significant Accounting Policies Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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 state- ments and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition The Company applies Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB No. 104”) to its revenue arrangements. The Company generates product revenues from the sale of Protein A products to customers in the phar- maceutical and process chromatography industries and from the sale of SecreFlo® to hospital-based gastroenterologists. In accordance with SAB No. 104, the Company recognizes revenue related to product sales upon delivery of the product to the customer as long as there is persuasive evidence of an arrangement, the sales price is fixed or determin- able and collection of the related receivable is rea- sonably assured. Determination of whether these criteria have been met are based on management’s judgments primarily regarding the fixed nature of the fee charged for product delivered, and the collect- ibility of those fees. The Company has a few long- standing customers who comprise the majority of product revenue and have excellent payment history. The Company has had no significant write-offs of uncollectible invoices in the periods presented. Should changes in conditions cause management to determine that these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected. At the time of sale, the Company also evaluates the need to accrue for warranty and sales returns. The supply agreements the Company has with its cus- tomers and related purchase orders identify the terms and conditions of each sale and the price of the goods ordered. Due to the nature of the sales arrangements, inventory produced for sale is tested for quality specifications prior to shipment. Since the product is manufactured to order and in compliance with required specifications prior to shipment, the likelihood of sales return, warranty or other issues is largely diminished. Sales returns and warranty issues are infrequent and have had nominal impact on the Company’s financial statements historically. Should changes in conditions cause management to deter- mine that warranty, returns or other sale-related reserves are necessary for certain future transac- tions, revenue recognized for any reporting period could be adversely affected. During the fiscal year ended March 31, 2007, the Company recognized $825,000 of revenue from a sponsored research and development project under an agreement with the Stanley Medical Research Institute (“SMRI”). Research revenue is recognized on a cost plus fixed-fee basis when the expense has been incurred and services have been performed. Determination of which costs incurred qualify for reimbursement under the terms of the contractual agreement and the timing of when such costs were incurred involves the judgment of management. The Company believes its calculations are based upon the agreed-upon terms as stated in the arrangement. However, should the estimated calculations change or be challenged by SMRI, research revenue may be adjusted in subsequent periods. The calculations have not historically changed or been challenged and the Company does not anticipate any subsequent change in its revenue related to this sponsored research and development project. 2007 ANNUAL REPORT F.21 F.22 NOTES TO FINANCIAL STATEMENTS (continued) Additionally, during fiscal year 2007, the Company earned and recognized approximately $175,000 in royalty revenue from ChiRhoClin, Inc. Revenues earned from ChiRhoClin royalties are recorded in the periods when they are earned based on royalty reports sent by ChiRhoClin to the Company. There have been no material changes to the Com- pany’s initial estimates related to revenue recogni- tion in any periods presented in the accompanying financial statements. Risks and Uncertainties The Company evaluates its operations periodically to determine if any risks and uncertainties exist that could impact its operations in the near term. The Company does not believe that there are any signifi- cant risks which have not already been disclosed in the financial statements. However, the Company does rely on a single supplier for SecreFlo® materi- als. Although alternate sources of supply exist for these items, loss of certain suppliers could tempo- rarily disrupt operations. The Company attempts to mitigate these risks by working closely with key sup- pliers, identifying alternate sources and developing contingency plans. Comprehensive Income The Company applies Statement of Financial Account- ing Standards (“SFAS”) No. 130, “Reporting Compre- hensive 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 enter- prise during a period from transactions and other events and circumstances from nonowner sources. The Company’s comprehensive income (loss) is equal to its reported net income (loss) for all periods presented. Cash Equivalents and Marketable Securities The Company applies SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” At March 31, 2007, the majority of the Company’s cash equivalents and marketable securities are classified as held-to-maturity investments as the Company has the positive intent and ability to hold to maturity. As a result, these investments are recorded at amortized cost. Marketable securities are invest- ments with original maturities of greater than 90 days. Long-term marketable securities are invest- ment grade securities with maturities of greater than one year. At March 31, 2007, marketable securities also include investment grade auction rate securities, which pro- vide higher yields than money market and other cash equivalent investments. Auction rate securities have long-term underlying maturities, but have interest rates that are reset every 90 days or less, at which time the securities can typically be purchased or sold, which creates a highly liquid market for these securities. The Company does not intend to hold these securities to maturity, but rather to use the securities to provide liquidity as necessary. Auction rate securities are classified as available-for-sale and reported at fair value. Due to the reset feature and their carrying value equaling their fair value, there are no unrealized gains or losses from these short-term investments. Cash equivalents and marketable securities consist of the following at March 31, 2007 and 2006: Cash and cash equivalents Marketable securities: U.S. Government and agency securities Auction Rate Securities Corporate and other debt securities Long-term marketable securities: U.S. Government and agency securities Corporate and other debt securities As of March 31, Unrealized Holding Loss Year ended March 31, 2007 2006 2007 2006 $ 7,726,505 $ 5,428,477 $ — $ — 3,460,665 475,000 10,965,175 8,048,129 1,075,000 4,324,471 (8,273) — (9,877) (64,571) — — $ 14,900,840 $ 13,447,600 $ (18,150) $ (64,571) — — 1,900,000 2,631,548 — — (25,328) (38,915) $ — $ 4,531,548 $ — $ (64,243) Restricted cash of $200,000 is related to the Company’s facility lease obligation. Average of remaining maturity of approximately 5 months at March 31, 2007. Assumes auction rate maturity set at date of next auction. REPLIGEN CORPORATION NOTES TO FINANCIAL STATEMENTS (continued) Fair Value of Financial Instruments The carrying amounts of the Company’s financial instruments which represent cash, marketable secu- rities, and accounts receivable generally approximate fair value due to the short-term nature of these instruments. Concentrations of Credit Risk and Significant Customers Financial instruments that subject the Company to significant concentrations of credit risk primarily con- sist of cash and cash equivalents, marketable securi- ties and accounts receivable. The Company’s cash equivalents and marketable securities are invested in financial instruments with high credit ratings and by policy limits the amount of its credit exposure to any one issue, issuer, (with the exception of U.S. Treasury obligations) and type of instrument. At March 31, 2007, the Company has no items such as those associated with foreign exchange contracts, options contracts or other foreign hedging arrangements. Concentration of credit risk with respect to accounts receivable is limited to customers to whom the Company makes significant sales. The Company maintains reserves for the potential write-off of accounts receivable. To date, the Company has not written off any significant accounts. To control credit risk, the Company performs regular credit evalua- tions of its customers’ financial condition. Revenue from significant customers as a percentage of the Company’s total revenue is as follows: Customer A Customer B Customer C Years ended March 31, 2007 2006 2005 49% 49% 54% *% 10% 23% 26% 13% *% Inventories Inventories relate to the Company’s Protein A busi- ness. The Company values inventory at cost or, if lower, fair market value. Repligen determines cost using the first-in, first-out method. The Company reviews its inventories at least quarterly and records a provision for excess and obsolete inventory based on its estimates of expected sales volume, produc- tion capacity and expiration dates of raw materials, work-in-process and finished goods. Expected sales volumes are determined based on supply forecasts provided by key customers for the next three to twelve months. The Company writes down inven- tory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable value, and inventory in excess of expected require- ments to cost of goods sold. Manufacturing of Protein A finished goods is done to order and tested for quality specifications prior to shipment. A change in the estimated timing or amount of demand for our products could result in additional provisions for excess inventory quantities on hand. Any significant unanticipated changes in demand or unexpected quality failures could have a significant impact on the value of inventory and reported oper- ating results. During all periods presented in the accompanying financial statements, there has been no material adjustments related to a revised estimate of inventory valuations. Inventories are stated at the lower of cost (first-in, first-out) or market. Work-in-process and finished goods inventories consist of material, labor, outside processing costs and manufacturing overhead. Inventories at March 31, 2007 and 2006 consist of the following: F.23 As of March 31, 2007 2006 $ 733,112 616,519 164,940 $ 600,948 596,386 268,258 $ 1,514,571 $ 1,465,592 * Represents less than 10% of total revenue for the period. Significant accounts receivable balances as a per- centage of the Company’s total trade accounts receivable balances are as follows: Raw materials Work-in-process Finished goods Total Customer A Customer B Customer C Customer D As of March 31, 2007 2006 15% 25% *% 13% *% 11% 47% 25% * Did not represent 10% of total accounts receivable at March 31, 2007. Depreciation and Amortization Depreciation and amortization are calculated using the straight-line method over the estimated useful life of the asset as follows: Description Estimated Useful Life Leasehold improvements Shorter of term of the lease or estimated useful life Equipment Furniture and fixtures 3–5 years 5 years 2007 ANNUAL REPORT F.24 NOTES TO FINANCIAL STATEMENTS (continued) The Company recorded depreciation and amortiza- tion of property, plant and equipment expense of $539,032, $398,434 and $363,738 in 2007, 2006 and 2005, respectively. Depreciation of assets under capital leases is included in depreciation and amor- tization. The amount of depreciation recorded for assets under capital lease agreements for fiscal years 2007, 2006 and 2005 was $41,850, $16,268 and $4,721, respectively. Earnings Per Share The Company applies the provisions of Statement of Financial Accounting Standard (“SFAS”) No. 128, “Presenting Earnings Per Share.” Basic earnings per share for the periods ended March 31, 2007, 2006 and 2005 were computed on the basis of the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed on the basis of the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstand- ing during the period using the treasury stock method in accordance with SFAS No. 128. Dilutive potential common shares include outstanding stock options. Basic and diluted weighted average shares outstand- ing were as follows: Twelve Months ended March 31, 2007 2006 2005 Weighted aver- age common shares outstanding Dilutive com- mon stock options Weighted aver- age common shares out- standing, assuming dilution 30,379,350 30,125,041 30,061,812 — 565,900 — 30,379,350 30,690,941 30,061,812 Diluted weighted average shares outstanding for 2007 does not include the potential common shares for stock options because to do so would be anti- dilutive. Accordingly, basic and diluted net loss per share is the same. The number of potential common shares excluded from the calculation of diluted earn- ings per share during the year ended March 31, 2007 was 2,292,750. For the year ended March 31, 2006, options to pur- chase 955,400 shares were excluded from the calculation of diluted earnings per share because the exercise prices of the stock options were greater than or equal to the average price of the common shares. Diluted weighted average shares outstanding for 2005 do not include the potential common shares from warrants and stock options because to do so would have been antidilutive. Accordingly, basic and diluted net loss per share is the same. The number of potential common shares excluded from the cal- culation of diluted earnings per share during the year ended March 31, 2005 was 2,166,900. Segment Reporting The Company applies SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Infor- mation.” 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 geo- graphic areas. The chief operating decision maker, or decision-making group, in making decisions how to allocate resources and assess performance, iden- tifies 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 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 reve- nue by geographic area (based on the location of the customer): Europe United States Other Total Year ended March 31, 2007 2006 2005 52% 51% 56% 47% 48% 43% 1% 1% 1% 100% 100% 100% The following table represents the Company’s prod- uct revenue by product type: Year ended March 31, 2007 2006 2005 Protein A SecreFlo® Other product revenue $ 11,127 1,947 — $ 10,540 1,989 — $ 7,134 2,189 37 Product revenue $ 13,074 $ 12,529 $ 9,360 As of March 31, 2007 and 2006, all of the Company’s assets are located in the United States. REPLIGEN CORPORATION NOTES TO FINANCIAL STATEMENTS (continued) Recent Accounting Pronouncements Accounting for Uncertainty in Income Taxes: In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109” (the “Interpretation”). The Interpretation clarifies the accounting for uncertainty in income taxes recog- nized in an enterprise’s financial statements in accor- dance with FASB Statement No. 109, “Accounting for Income Taxes.” The Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measure- ment of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guid- ance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Interpretation is effective for fis- cal years beginning after December 15, 2006. The Company has not yet completed its evaluation of the Interpretation, but does not currently believe that adoption will have a material impact on its results of operations, financial position or cash flows. Fair Value Measurements: In September 2006, the FASB issued FASB Statement No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 establishes a common definition for fair value, cre- ates a framework for measuring fair value, and expands disclosure requirements about such fair value measurements. SFAS No. 157 is effective for our first quarter of 2008. Management does not cur- rently believe that adoption will have a material impact on its results of operations, financial position or cash flows. Fair Value Option for Financial Assets and Finan- cial Liabilities: In February 2007, the FASB issued FASB Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 provides companies with an option to report selected financial assets and liabili- ties at fair value. The objective of SFAS No. 159 is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. Generally accepted accounting principles have required different measurement attributes for differ- ent assets and liabilities that can create artificial vola- tility in earnings. FASB has indicated it believes that SFAS No. 159 helps to mitigate this type of account- ing-induced volatility by enabling companies to report related assets and liabilities at fair value, which would likely reduce the need for companies to comply with detailed rules for hedge accounting. SFAS No. 159 also establishes presentation and disclosure require- ments designed to facilitate comparisons between companies that choose different measurement attri- butes for similar types of assets and liabilities. For example, SFAS No. 159 requires companies to pro- vide additional information that will help investors and other users of financial statements to more easily understand the effect of the company’s choice to use fair value on its earnings. It also requires enti- ties to display the fair value of those assets and liabil- ities for which the company has chosen to use fair value on the face of the balance sheet. SFAS No. 159 does not eliminate disclosure requirements included in other accounting standards, including requirements for disclosures about fair value mea- surements included in FASB Statement No. 157, “Fair Value Measurements” (“SFAS No. 157”), and FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments” (“SFAS No. 107”). SFAS No. 159 is effective as of the beginning of a company’s first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the begin- ning of the previous fiscal year provided that the company makes that choice in the first 120 days of that fiscal year and also elects to apply the provi- sions of SFAS No. 157. The Company has not yet completed its evaluation of the Interpretation, but does not currently believe that adoption will have a material impact on its results of operations, financial position or cash flows. Stock-Based Compensation In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R, “Share-Based Payment—An Amendment of FASB Statements No. 123 and 95,” (“SFAS No. 123R”), which requires all companies to measure compensa- tion cost for all share-based payments, including employee stock options, at fair value. Generally, the approach in SFAS No. 123R is similar to the approach described in SFAS No. 123, “Accounting for Stock- Based Compensation,” (“SFAS No. 123”). However, SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair value over the requisite service period. Pro forma disclosure is no longer an alterna- tive. In March 2005, the SEC issued Staff Accounting Bulletin (“SAB”) No. 107 (“SAB No. 107”), which expressed the views of the SEC regarding the interac- tion between SFAS No. 123R and certain rules and regulations of the SEC. SAB No. 107 provides guid- ance related to the valuation of share-based payment arrangements for public companies, including assump- tions such as expected volatility and expected term. 2007 ANNUAL REPORT F.25 NOTES TO FINANCIAL STATEMENTS (continued) Prior to the adoption of SFAS No. 123R, the Com- pany applied SFAS No. 123, “Accounting for Stock- Based Compensation,” amended by SFAS No. 148, “Accounting for Stock-Based Compensation—Tran- sition and Disclosure,” which allowed companies to apply the existing accounting rules under APB Opinion No. 25. Pursuant to APB Opinion No. 25, the Company accounted for its stock-based awards to employees using the intrinsic-value method, under which compensation expense was measured on the date of grant as the difference between the fair value of the Company’s common stock and the option exercise price multiplied by the number of options granted. Generally, the Company granted stock options with exercise prices equal to the esti- mated fair value of its common stock; however, to the extent that the fair value of the common stock exceeded the exercise price of stock options granted to employees on the date of grant, the Company recorded deferred compensation and amortized the expense over the vesting schedule of the options, generally four years. During the years ended March 31, 2006 and 2005, in accordance with APB Opinion No. 25, the Company recorded deferred stock-based compensation resulting from the grant of employee stock options with an exercise price less than the fair value of common stock. As of March 31, 2006, the Company had $ 61,950 of deferred stock-based compensation remaining to be amortized. Upon the adoption of SFAS No. 123R on April 1, 2006, the deferred stock-based compensa- tion balance was netted against additional paid-in capital on the consolidated balance sheet and state- ment of stockholders’ equity. The following table illustrates the effect on net income and net income per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to options granted under the Plans for the fiscal years ended March 31, 2005 and 2006. Since stock-based compensation expense for the fis- cal years ended March 31, 2007 was calculated under the provisions of SFAS No. 123R, there is no disclosure of pro forma net income and net income per share for that period. For purposes of the pro forma disclosure for the fiscal years ended March 31, 2005 and 2006 set forth in the table below, the value of the options is estimated using a Black- Scholes option pricing model and amortized on a straight-line basis to expense over the options’ vest- ing periods. Net income (loss) as reported Add: Stock-based employee compensation cost included in reported net income (loss) Deduct: Stock-based employee compensation cost that would have been included in the determination of net loss as reported if the fair value method had been applied to all awards Year ended March 31, 2006 2005 $ 696,860 $(2,983,574) 20,650 8,042 (745,043) (980,240) Pro forma net (loss) $ (27,533) $(3,955,772) Basic and diluted net income (loss) per com- mon share, as reported Basic and diluted net income (loss) per com- mon share, as pro forma $ 0.02 $ (0.10) $ — $ (0.13) Effective April 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123R, using the modified prospective transition method. Under this transition method, compensation cost recognized in the statement of operations for the fis- cal year ended March 31, 2007 includes: (a) compen- sation cost for all share-based payments granted prior to, but not yet vested as of April 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123 adjusted for estimated forfeitures and (b) compensation cost for all share-based payments granted, modified or settled subsequent to April 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R. In accordance with the modified prospective transition method, results for prior periods have not been restated. For the fiscal year ended March 31, 2007, the Com- pany recorded stock-based compensation expense of approximately $837,000 for stock options granted under the Amended and Restated 2001 Repligen Corporation Stock Plan. Basic and diluted earnings per share amounts for the fiscal year ended March 31, 2007 were decreased by $0.03 as a result of the adoption of SFAS No. 123R. F.26 REPLIGEN CORPORATION NOTES TO FINANCIAL STATEMENTS (continued) The Company currently has the following stock- based employee compensation plans which are sub- ject to the provisions of SFAS No. 123R: the 1992 Repligen Corporation Stock Option Plan, as amended, and the Amended and Restated 2001 Repligen Corporation Stock Plan (collectively, the “Plans”). The 1992 Repligen Corporation Stock Option Plan expired on September 14, 2001, though this had no impact on outstanding option grants. Options granted prior to the date of termination remain out- standing and may be exercised in accordance with their terms. The Plans allow for the granting of incentive and non- qualified options and restricted stock and other equity awards to purchase shares of common stock. Historically, incentive options granted to employees under the Plans generally vested over a four to five- year period, with 20%–25% vesting on the first anni- versary of the date of grant and the remainder vesting in equal yearly installments thereafter. Nonqualified options issued to non-employee directors and con- sultants under the Plans generally vest over one year. Options granted under the Plans have a maximum term of ten years from the date of grant and gener- ally, the exercise price of the stock options equals the fair market value of the Company’s common stock on the date of grant. At March 31, 2007, options to purchase 1,424,250 shares were outstand- ing under the Amended and Restated 2001 Repligen Corporation Plan and 868,500 were outstanding under the 1992 Repligen Corporation Stock Option Plan. At March 31, 2007, 420,109 shares were avail- able for future grant under the Amended and Restated 2001 Repligen Corporation Stock Plan. The Company uses the Black-Scholes option pricing model to calculate the fair value on the grant date of stock-based compensation for stock options granted under the Plans. The fair value of stock options granted during the fiscal years ended March 31, 2007 and March 31, 2006 were calculated using the following esti- mated weighted average assumptions: Year ended March 31, 2007 2006 2005 Expected term (years) Volatility Risk-free interest rate Expected dividend yield 6.5 7 77.24%–91.86% 90.79%–94.41% 94.17%–95.38% 4.44%– 5.07% 3.83%– 4.58% 3.76%– 4.29% — — — 7 F.27 Expected Term: The expected term of options granted represents the period of time for which the options are expected to be outstanding and is derived from the Company’s historical stock option exercise experience and option expiration data. For option grants made subsequent to the adoption of SFAS No. 123R, the expected life of stock options granted is based on the simplified method allowable under SAB No. 107. Accordingly, the expected term is pre- sumed to be the midpoint between the vesting date and the end of the contractual term. In addition, for purposes of estimating the expected term, the Company has aggregated all individual option awards into one group as the Company does not expect sub- stantial differences in exercise behavior among its employees. stock over a period commensurate with the option’s expected term. The Company does not believe that the future volatility of its common stock over an option’s expected term is likely to differ significantly from the past. Risk-Free Interest Rate: The risk-free interest rate is the implied yield available on U.S. Treasury zero- coupon issues with a remaining term equal to the option’s expected term on the grant date. Expected Dividend Yield: The Company has never declared or paid any cash dividends on any of its capital stock and does not expect to do so in the foreseeable future. Accordingly, the Company uses an expected dividend yield of zero to calculate the grant-date fair value of a stock option. Expected Volatility: The expected volatility is a measure of the amount by which the Company’s stock price is expected to fluctuate during the expected term of options granted. The Company determines the expected volatility solely based upon the historical volatility of the Company’s common The Company recognizes compensation expense on a straight-line basis over the requisite service period based upon options that are ultimately expected to vest, and accordingly, such compensation expense has been adjusted by an amount of estimated for- feitures. Forfeitures represent only the unvested 2007 ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS (continued) portion of a surrendered option. SFAS No. 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those esti- mates. Prior to the adoption of SFAS No. 123R, the Company accounted for forfeitures upon occur- rence as permitted under SFAS No. 123. Based on an analysis of historical data, the Company has calcu- lated an 8% annual forfeiture rate for non-director- level employees, a 3% annual forfeiture rate for director-level employees, and a 0% forfeiture rate for non-employee members of the Board of Directors, which it believes is a reasonable assumption to esti- mate forfeitures. However, the estimation of forfei- tures requires significant judgment, and to the extent actual results or updated estimates differ from the Company’s current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. Information regarding option activity for the year ended March 31, 2007 under the Plans is summarized below: Options Outstanding (In thousands) Weighted Average Exercise Price Per Share Weighted Average Remaining Contractual Term (In years) Aggregate Intrinsic Value (In thousands) Options outstanding at March 31, 2004 Granted Exercised Forfeited/Cancelled Options outstanding at March 31, 2005 Granted Exercised Forfeited/Cancelled Options outstanding at March 31, 2006 Granted Exercised Forfeited/Cancelled F.28 Options outstanding at March 31, 2007 Options exercisable at March 31, 2007 Vested and expected to vest at March 31, 2007(1) 2,051 340 (58) (191) 2,142 629 (238) (130) 2,403 210 (110) (210) 2,293 1,564 2,235 $3.01 2.56 0.52 3.07 3.00 3.04 1.36 3.13 3.17 2.98 1.43 3.03 $3.25 $3.28 $2.63 — — — — — — — — — — — — 5.39 4.13 5.29 — — — — — — — — — — — — $1,485 $1,209 $1,468 (1) This represents the number of vested options as of March 31, 2007 plus the number of unvested options expected to vest as of March 31, 2007 based on the unvested outstanding options at March 31, 2007 adjusted for the estimated forfeiture rate of 8% for awards granted to non-director level employees and 3% for awards granted to director level employees. The aggregate intrinsic value in the table above rep- resents the total pre-tax intrinsic value (the differ- ence between the closing price of the common stock on March 30, 2007 of $3.16 and the exercise price of each in-the-money option) that would have been received by the option holders had all option holders exercised their options on March 30, 2007. The weighted average grant date fair value of options granted during the fiscal year ended March 31, 2007 was $2.31. The total fair value of stock options that vested during the fiscal year ended March 31, 2007 and 2006 was approximately $869,000 and $871,000, respectively. The total intrinsic value of options exercised during the years ended March 31, 2007, 2006 and 2005 was $189,800, $852,152 and $95,563, respectively, determined as of the date of exercise. The Company received $158,000, $340,111 and $30,501 from stock option exercises during the years ended March 31, 2007, 2006 and 2005, respectively. As of March 31, 2007, there was $1,275,000 of total unrecognized compensation cost related to unvested share-based awards. This cost is expected to be rec- ognized over a weighted average remaining requisite service period of 2.86 years. The Company expects approximately 671,000 of unvested outstanding options to vest over the next five years. REPLIGEN CORPORATION NOTES TO FINANCIAL STATEMENTS (continued) The range of exercise prices for options outstanding and exercisable as of March 31, 2007 are as follows: Range of Exercise Prices $0.00–$1.24 $1.25–$2.49 $2.50–$3.73 $3.74–$4.98 $4.99–$6.22 $6.23–$7.47 $7.48–$8.56 Outstanding as of March 31, 2007 Exercisable as of March 31, 2007 Weighted Average Remaining Contractual Life in Years Weighted Average Exercise Price Number of Shares Weighted Average Exercise Price 2.99 3.72 6.64 8.54 5.98 3.47 4.69 5.39 $1.01 1.64 3.04 4.19 5.53 7.19 7.93 $3.25 17,000 687,900 480,200 39,700 119,999 5,000 214,000 1,563,799 $1.01 1.59 3.03 4.23 5.54 7.19 7.93 $3.28 Number of Shares 17,000 858,000 868,250 134,500 196,000 5,000 214,000 2,292,750 3. Income Taxes The Company accounts for income taxes under SFAS No. 109, “Accounting for Income Taxes.” The Com- pany did not record a tax provision for the years ended March 31, 2007, 2006 and 2005 as the Company did not generate taxable income. At March 31, 2007, the Company had net operating loss carryforwards for income tax purposes of approximately $100,130,000. The Company also had available tax credit carryforwards of approximately $5,270,000 at March 31, 2007 to reduce future fed- eral income taxes, if any. Federal and state net oper- ating losses of approximately $9,004,000, $7,689,000 and $7,390,000 expired in fiscal 2007, 2006 and 2005, respectively. The net operating loss and tax credit carryforwards will continue to expire at various dates. Net operating loss carryforwards and avail- able tax credits are subject to review and possible adjustment by the Internal Revenue Service and may be limited in the event of certain changes in the own- ership interest of significant stockholders. Deferred tax assets consist of the following: Temporary differences Operating loss carryforwards Tax credit carryforwards Valuation allowance As of March 31, 2007 2006 $ 6,580,000 $ 7,420,000 40,060,000 5,270,000 42,520,000 5,590,000 51,910,000 (51,910,000) 55,530,000 (55,530,000) $ — $ — A full valuation allowance has been provided, as it is uncertain if the Company will realize its deferred tax assets. A reconciliation of the federal statutory rate to the effective income tax rate from operations for fiscal years ended March 31, 2007, 2006 and 2005 is as follows: Tax at U.S. statutory rate State taxes, net of federal benefit Permanent differences, net of federal benefit Change in valuation allowance Years ended March 31, Years ended March 31, 2007 2006 2005 2007 2006 2005 $ (302,350) — $ (237,000) — $ (1,014,000) — 34.00% 0.00% 34.00% 0.00% 34.00% 0.00% 152,887 (149,463) (5,000) (242,000) 6,000 1,008,000 (17.00)% (0.20)% 0.08% (17.00)% (34.08)% (33.80)% Income tax expense $ — $ — $ — 0.00% 0.00% 0.00% 4. Stockholders’ Equity Common Stock and Warrants At March 31, 2007, the Company has reserved 2,712,859 shares of common stock for incentive and nonqualified stock option plans. Shareholder Rights Plan In March 2003, the Company adopted a Shareholder Rights Agreement (the “Rights Agreement”). Under the Rights Agreement, the Company distributed certain rights to acquire shares of the Company’s 2007 ANNUAL REPORT F.29 F.30 NOTES TO FINANCIAL STATEMENTS (continued) Series A junior participating preferred stock (the “Rights”) as a dividend for each share of common stock held of record as of March 17, 2003. Each share of common stock issued after the March 17, 2003 record date has an attached Right. Under cer- tain conditions involving an acquisition by any person or group of 15% or more of the common stock, each Right permits the holder (other than the 15% holder) to purchase common stock having a value equal to twice the exercise price of the Right, upon payment of the exercise price of the Right. In addition, in the event of certain business combinations after an acquisition by a person or group of 15% or more of the common stock (20% in the case of a certain stockholder), each Right entitles the holder (other than the 15% holder) to receive, upon payment of the exercise price, common stock having a value equal to twice the exercise price of the Right. The Rights have no voting privileges and, unless and until they become exercisable, are attached to, and auto- matically trade with, the Company’s common stock. The Rights will terminate upon the earlier of the date of their redemption or March 2013. 5. Commitments and Contingencies Lease Commitments In 2001, the Company entered into a ten-year lease agreement for its corporate headquarters in Waltham, Massachusetts. In connection with this lease agree- ment, the Company issued a letter of credit in the amount of $200,000 to its landlord. The letter of credit is collateralized by a certificate of deposit held by the bank that issued the letter of credit. The cer- tificate of deposit is classified as restricted cash in the accompanying balance sheet as of March 31, 2007 and 2006. The Company signed a lease in April 2007 for 2,500 square feet of space in Waltham, Massachusetts for off-site storage of materials. The lease expires in March 2012. In fiscal 2006, the Company entered into a capital lease agreement to provide the Company with man- ufacturing equipment. Repligen received approx- imately $171,000 in equipment financing over a five-year period. In fiscal 2005, the Company entered into two capital lease agreements to provide the Company with two pieces of office equipment. Repligen received approximately $33,000 in equip- ment financing. The lease terms are three and five years beginning in June and October of 2004, respec- tively. Capital lease obligations are recorded in accrued liabilities and long-term liabilities in the Company’s balance sheets. Obligations under non-cancelable operating leases and capital equipment leases, including the facility lease discussed above, as of March 31, 2007 are approximately as follows: Years ending March 31, 2008 2009 2010 2011 Thereafter Operating Lease Capital Lease $ 449,000 455,000 473,000 473,000 361,000 $ 48,870 48,870 45,209 — — Minimum lease payments $ 2,211,000 $ 142,949 Less amount representing interest Present value of future lease payment Less current portion Noncurrent obligation under capital leases (17,648) 125,301 (48,870) $ 76,431 Rent expense charged to operations under operating leases was approximately $389,000 for each of the years ended March 31, 2007, 2006 and 2005. As of March 31, 2007 and 2006, the Company had deferred rent liability of $119,000 and $120,000, respectively, related to the Waltham facility. Licensing and Research Agreements The Company licenses certain technologies that are, or may be, incorporated into its technology under several agreements and also has entered into several clinical research agreements which require the Company to fund certain research projects. Generally, the license agreements require the Company to pay annual maintenance fees and royalties on product sales once a product has been established using the technologies. The Company has recorded research and development expense associated with license agreements of $87,000, $114,000 and $55,000, for the years ended March 31, 2007, 2006 and 2005, respectively. Supply Agreements The Company has entered into an agreement with a manufacturer for certain components of its Protein A product. The Company has remaining purchase obli- gations of approximately $298,000 associated with this agreement for the year ended March 31, 2008. The Company relies on a sole manufacturer for its SecreFlo® product. This reliance exposes it to a num- ber of risks, including reduced control over manufac- turing capacity, delivery times, inadequate inventory levels which could lead to product shortage or charges for excess or obsolete inventory. REPLIGEN CORPORATION NOTES TO FINANCIAL STATEMENTS (continued) 6. Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consist of the following: Prepaid insurance Equipment and services Interest receivable Clinical and research expenses Other As of March 31, 2007 2006 $ 124,376 71,656 167,483 47,636 34,264 $ 115,591 221,565 188,751 32,829 16,302 $ 445,415 $ 575,038 7. Accrued Liabilities The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States. These principles require that the Company estimate accrued liabilities. This process involves identifying services, which have been performed on the Company’s behalf, and estimating the level of service performed and the associated cost incurred for such service as of each balance sheet date. Examples of estimated accrued expenses include: 1) Fees paid to contract manufac- turers in conjunction with the production of clinical materials. These expenses are normally determined through a contract or purchase order issued by the Company; 2) Service fees paid to organizations for their performance in conducting clinical trials. These expenses are determined by contracts in place for those services and communications with project managers on costs which have been incurred as of each reporting date; 3) Professional and consulting fees incurred with law firms, audit and accounting service providers and other third-party consultants. These expenses are determined by either requesting those service providers to estimate unbilled services at each reporting date for services incurred, or track- ing costs incurred by service providers under fixed- fee arrangements. The Company has processes in place to estimate the appropriate amounts to record for accrued liabilities, which principally involve the applicable personnel reviewing the services pro- vided. In the event that the Company does not iden- tify certain costs which have begun to be incurred or the Company under- or over-estimates the level of services performed or the costs of such services, the reported expenses for that period may be too low or too high. The date on which certain services commence, the level of services performed on or before a given date, and the cost of such services are often judgmental. The Company makes these judgments based upon the facts and circumstances known at the date of the financial statements. A change in the estimated cost or volume of services provided could result in additional accrued liabilities. Any significant unanticipated changes in such esti- mates could have a significant impact on our accrued liabilities and reported operating results. There has been no material adjustments to our accrued liabili- ties in any of the periods presented in the accompa- nying financial statements. Accrued liabilities consist of the following: Royalty expenses Payroll & payroll-related costs Research & development As of March 31, 2007 2006 $ 56,529 557,100 $ — 474,923 costs 602,615 436,016 Professional and consulting costs Other accrued expenses Unearned revenue Other current liabilities 400,474 122,836 127,170 309,015 320,694 62,767 38,599 536,350 $ 2,175,739 $ 1,869,349 In February 2004, the Company terminated its Licensing Agreement with ChiRhoClin. On May 9, 2005, Repligen entered into a Settlement Agreement with ChiRhoClin, Inc., in full settlement of their arbi- tration proceedings described below. Repligen deter- mined that it was not required to pay approximately $1,170,000 of unremitted and accrued royalties to ChiRhoClin. This was recorded as other income in the quarter ended June 30, 2005. Under the terms of the Agreement, Repligen also received a payment of $750,000 and will be entitled to continue to mar- ket SecreFlo® for the next few years under a royalty structure more favorable to Repligen than under the Licensing Agreement. ChiRhoClin is obligated to deliver a certain amount of SecreFlo® to Repligen over the next few years. This payment of $750,000 was recorded as “Accrued Liabilities” at the time of settlement. The adoption of EITF 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor (“EITF 02-16”) has resulted in the Company reducing cost of goods sold as future inventory purchased from ChiRhoClin is sold. Other current liabilities as of March 31, 2007 includes $269,052 related to ChiRhoClin settlement which will be relieved as a reduction to cost of good sold as future inventory purchased from ChiRhoClin is sold. 8. Employee Benefit Plan The Repligen Corporation 401(k) Savings and Retirement Plan (the “401(k) Plan”) is a qualified defined contribution plan in accordance with Section 2007 ANNUAL REPORT F.31 F.32 NOTES TO FINANCIAL STATEMENTS (continued) 401(k) of the Internal Revenue Code. All employees over the age of 21 who have completed four months of service are eligible to make pre-tax contributions up to a specified percentage of their compensation. Under the 401(k) Plan, the Company may, but is not obligated to match a portion of the employees’ con- tributions up to a defined maximum. The match is calculated on a calendar year basis. The Company matched $ 31,353, $27,278 and $ 34,245 for the fiscal years ended March 31, 2007, 2006 and 2005, respectively. Forfeitures of previous participants par- tially funded contributions for fiscal year 2007. For- feitures of previous participants completely funded contributions for fiscal years 2006 and 2005 and as a result had no impact on the Company’s operations. 9. Related Party Transaction Repligen paid Drs. Schimmel and Rich, the Co- Chairmen of the Board of Directors, $49,200 and $43,200, respectively, during each of the fiscal years ended March 31, 2007, 2006 and 2005 pursuant to consulting agreements, which have similar terms. These agreements are automatically extended for successive one-year terms unless terminated by either party to the agreement at least 90 days prior to the next anniversary date. Dr. Schimmel’s agree- ment continues until September 30, 2007 and Dr. Rich’s agreement continues until October 31, 2007. Dr. Schimmel will retire from the Board as of the next annual meeting in September 2007. Dr. Rich has advised Repligen that he has no present inten- tion of terminating his agreement. Drs. Schimmel and Rich receive no separate cash compensation for attendance at meetings or otherwise as directors. 10. Legal Proceedings ImClone Systems In July 2006, Repligen reported that the United States District Court for the District of Massachu- setts issued a Summary Judgment ruling in favor of Repligen and the Massachusetts Institute of Technology (“MIT”) and rejected ImClone Systems Incorporated’s (“ImClone”) defense of patent exhaus- tion in the ongoing patent infringement lawsuit over the production of Erbitux ®. In their complaint, Repligen and MIT allege that ImClone’s production of Erbitux® infringes U.S. patent 4,663,281 which covers certain genetic elements that increase pro- tein production in a mammalian cell. This patent is assigned to MIT and exclusively licensed to Repligen. ImClone had previously reported that it produced approximately $1 billion worth of Erbitux® prior to the expiration of the patent-in-suit in 2004 and that Bristol-Myers Squibb, ImClone’s commercial partner, has paid ImClone $900 million in up-front and mile- stone payments as well as a 39% royalty on the net sales of Erbitux® in the United States. Repligen and MIT allege that the cell line that ImClone uses to produce Erbitux® employs key tech- nology that is claimed in the patent-in-suit. Repligen and MIT also allege that the cell line was created under contract for the National Cancer Institute (“NCI”) by a predecessor to Repligen and subse- quently transferred from the NCI to ImClone for use in research and development only. In its ruling, the Court found that neither the transfer to the NCI by Repligen’s predecessor nor the subsequent transfer to ImClone by the NCI exhausted the proprietary rights of Repligen and MIT. The Court’s ruling has eliminated these arguments as a potential defense for ImClone at trial. Repligen and MIT intend to seek damages adequate to compensate Repligen and MIT for ImClone’s unlicensed use of the patented tech- nology and a multiplier of any such damage award based on ImClone’s willful infringement. Bristol-Myers Squibb Company (“Bristol”) In January 2006, Repligen Corporation and the University of Michigan jointly filed a complaint against Bristol in the United States District Court for the Eastern District of Texas for infringement of U.S. Patent No. 6,685,941 (“the ‘941 patent”) for the commercial sale of Orencia®. The ‘941 patent, entitled “Methods of Treating Autoimmune Disease via CTLA4-Ig,” covers methods of using CTLA4-Ig to treat rheumatoid arthritis, as well as other thera- peutic methods. Repligen has exclusive rights to this patent from its owners, the University of Michigan and the U.S. Navy. In February 2006, Bristol answered the complaint and counterclaimed seeking a declaratory judgment that the ‘941 patent is invalid and unenforceable and that Bristol does not infringe the patent. On November 16, 2006, the Court held a scheduling conference. Jury selection for the trial in this matter is scheduled to commence on April 7, 2008. The outcome of this case is unde- terminable at this time. From time to time, we may be subject to legal pro- ceedings and claims, in the ordinary course of business. We are not currently aware of any such proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on the business, financial condition or results of operations. 11. Subsequent Event On April 6, 2007, Repligen Corporation entered into an exclusive worldwide commercial license agree- ment with The Scripps Research Institute (“Scripps”). Pursuant to the Agreement, the Company obtained a license to use, commercialize and sublicense certain patented technology and improvements thereon, owned or licensed by Scripps, relating to compounds which may have utility in treating Friedreich’s ataxia, an inherited neurodegenerative disease. Research in REPLIGEN CORPORATION NOTES TO FINANCIAL STATEMENTS (continued) tissues derived from patients, as well as, in mice, indicates that the licensed compounds increase production of the protein frataxin, which suggests potential utility of these compounds in slowing or stopping progression of the disease. There is cur- rently no treatment for Friedreich’s ataxia. Pursuant to the Agreement, the Company agreed to pay Scripps an initial license fee of $300,000, certain royalty and sublicense fees and, in the event the Company achieves specified developmental and commercial milestones, certain additional milestone payments. In addition, the Company issued Scripps 87,464 shares of the Company’s common stock (the “Shares”) representing $ 300,000 as of the Effective Date. If the value of the Shares does not equal at least $300,000 on the one-year anniversary of the Effective Date, the Company shall make a cash payment to Scripps equal to the difference between the actual total value of the Shares on the one-year anniversary of the Effective Date and the Effective Date. The Company issued the Shares in reliance on the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended. The Shares were issued exclusively to Scripps as an “accredited investor” (as such term is defined in Rule 501(a) of Regulation D) without general solicitation or advertising and did not involve a public offering. The Agreement expires or may be terminated (i) when all of the royalty obligations under the Agreement expire; (ii) at any time by mutual written consent; (iii) by Scripps if the Company (a) fails to make payments under the Agreement, (b) fails to achieve certain developmental and commercial objectives, (c) becomes insolvent, (d) is convicted of a felony relating the manufacture, use or sale of the licensed technology or (e) defaults in its performance under the Agreement; or (iv) by the Company upon 90 days written notice. 12. Selected Quarterly Financial Data (Unaudited) The following table contains Statements of Operations information for each quarter of fiscal 2007 and 2006. The Company believes that the following information reflects all normal recurring adjustments necessary for a fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period. Revenue: Product revenue Research revenue Total revenue Operating expenses: Cost of revenue Research and development Selling, general and administrative Total operating expenses Income (loss) from operations Investment income Interest expense Other income Net income (loss) Earning per share: Basic Diluted Q4 FY07 Q3 FY07 Q2 FY07 Q1 FY07 Q4 FY06 Q3 FY06 Q2 FY06 Q1 FY06 (In thousands, except per share amounts) $ 3,397 302 $ 3,633 249 $ 2,680 185 $ 3,364 264 $ 2,842 42 $ 2,958 30 $ 2,716 84 $ 4,013 226 3,699 3,882 2,865 3,628 2,884 2,988 2,800 4,239 902 1,452 1,696 4,050 (351) 247 (3) — 805 1,674 1,660 4,139 (257) 240 (3) — 915 1,583 1,463 3,961 (1,096) 236 (3) — 993 1,215 1,541 3,749 (121) 225 (3) — 889 1,412 1,597 3,898 (1,014) 198 (3) — 817 1,236 1,341 3,394 (406) 204 — — 872 1,325 1,283 3,480 (680) 212 — — 973 1,190 1,196 3,359 880 136 — 1,170 $ (107) $ (20) $ (863) $ 101 $ (819) $ (202) $ (468) $ 2,186 $ (0.00) $ (0.00) $ (0.03) $ (0.00) $ (0.03) $ (0.01) $ (0.02) $ 0.07 $ (0.00) $ (0.00) $ (0.03) $ (0.00) $ (0.03) $ (0.01) $ (0.02) $ 0.07 Weighted average shares outstanding: Basic 30,420 30,376 30,364 30,358 30,202 30,105 30,098 30,094 Diluted 30,420 30,376 30,364 30,828 30,202 30,105 30,098 30,399 13. Valuation and Qualifying Accounts Allowance for Doubtful Accounts: 2005 2006 2007 Balance at Beginning of Period $35,000 $15,000 $10,000 Reversal Without Utilization Balance at End of Period Additions — — — $15,000 $20,000 $ 5,000 $10,000 $ — $10,000 2007 ANNUAL REPORT F.33 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Repligen Corporation We have audited the accompanying balance sheets of Repligen Corporation as of March 31, 2007 and 2006, and the related statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended March 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Over- sight Board (United States). Those standards require that we plan and perform the audit to obtain reason- able assurance about whether the financial state- ments are free of material misstatement. An audit includes examining, on a test basis, evidence support- ing the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the over- all financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. March 31, 2007 and 2006, and the results of its oper- ations, and its cash flows for each of the three years in the period ended March 31, 2007, in conformity with U.S. generally accepted accounting principles. As discussed in Note 2 to the consolidated financial statements, on April 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123R, Share-Based Payment. We have also audited, in accordance with the stand- ards of the Public Company Accounting Oversight Board (United States), the effectiveness of Repligen Corporation’s internal control over financial reporting as of March 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 6, 2007 expressed an unqualified opinion thereon. ERNST & YOUNG LLP In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Repligen Corporation as of Boston, Massachusetts June 6, 2007 F.34 REPLIGEN CORPORATION MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management of the Company is responsible for establishing and maintaining adequate internal con- trol over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel to pro- vide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles and includes those policies and procedures that: • pertain to the maintenance of records that in rea- sonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; • provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of manage- ment and directors of the company; and • provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect mis- statements. Projections of any evaluation of effec- tiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compli- ance with the policies or procedures may deteriorate. Management assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2007. In making this assessment, management used the criteria established in Internal Control—Integrated Framework, issued by the Com- mittee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, our management concluded that, as of March 31, 2007, our internal control over financial reporting is effective based on those criteria. Our management’s assessment of the effectiveness of our internal con- trol over financial reporting as of March 31, 2007 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report appearing in Item 9A of this Form 10-K. REPLIGEN CORPORATION June 6, 2007 F.35 2007 ANNUAL REPORT ATTESTATION REPORT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Repligen Corporation We have audited management’s assessment, included in the accompanying Report of Manage- ment on Internal Control Over Financial Reporting, that the Company maintained effective internal con- trol over financial reporting as of March 31, 2007, based on criteria established in Internal Control- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commis- sion (the COSO criteria). Repligen Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Over- sight Board (United States). Those standards require that we plan and perform the audit to obtain reason- able assurance about whether effective internal con- trol over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluation of management’s assessment, testing and evaluating the design and operating effectiveness of internal control and performing such other procedures, as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assur- ance regarding the reliability of financial reporting and the preparation of financial statements for exter- nal purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as neces- sary to permit preparation of financial statements in accordance with generally accepted accounting principles, and the receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthor- ized acquisition, use, or disposition of the company’s assets that could have a material effect on the finan- cial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of March 31, 2007, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, the Company main- tained, in all material respects, effective internal con- trol over financial reporting as of March 31, 2007, based on the COSO criteria. We also have audited, in accordance with the stand- ards the Public Company Accounting Oversight Board (United States), the balance sheets of Repligen Corporation as of March 31, 2007 and 2006, and the related statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended March 31, 2007 and our report dated June 6, 2007, expressed an unqualified opin- ion thereon. ERNST & YOUNG LLP Boston, Massachusetts June 6, 2007 F.36 REPLIGEN CORPORATION CORPORATE INFORMATION BOARD OF DIRECTORS TRANSFER AGENT AND REGISTRAR ANNUAL MEETING American Stock Transfer & Trust Company 59 Maiden Lane Plaza Level New York, NY 10038 (877) 777-0800, select option 1 www.amstock.com Investor Relations E-mail: (Shareholder Inquiries) info@amstock.com The Transfer Agent is responsible for handling shareholder questions regarding lost certificates, address changes and changes of ownership or name in which shares are held. GENERAL COUNSEL Goodwin Procter LLP Exchange Place 53 State Street Boston, MA 02109 INDEPENDENT ACCOUNTANTS Ernst and Young, LLP 200 Clarendon Street Boston, MA 02116 The Annual Meeting of Stockholders will be held on Friday, September 14, 2007 at 10:00 AM at Repligen’s corporate offices, 41 Seyon Street Building #1, Suite 100 Waltham, MA 02453 MARKET FOR REPLIGEN CORPORATION STOCK Nasdaq Global Market Common Stock: RGEN INVESTOR INFORMATION Copies of our annual reports on Form 10-K, proxy statements, quarterly reports on Form 10-Q, and current reports on Form 8-K are available to stockholders upon request without charge. Please visit our website at www.repligen.com or send requests to: Repligen Corporation 41 Seyon Street Building #1, Suite 100 Waltham, MA 02453 ATTN: Investor Relations Phone: (781) 419-1823 Fax: (781) 250-0115 E-mail: investors@repligen.com Karen A. Dawes Principal Knowledgeable Decisions, LLC Robert J. Hennessey Former Chief Executive Officer Penwest Pharmaceuticals Co. Walter C. Herlihy, Ph.D. President and Chief Executive Officer Repligen Corporation Alexander Rich, M.D., Co-Chairman Sedgwick Professor of Biophysics Department of Biology Massachusetts Institute of Technology Thomas F. Ryan, Jr. Retired/Private Investor Paul Schimmel, Ph.D., Co-Chairman Ernest and Jean Hahn Professor of Molecular Biology & Chemistry The Skaggs Institute for Chemical Biology The Scripps Research Institute CORPORATE OFFICERS Walter C. Herlihy, Ph.D. President and Chief Executive Officer Daniel W. Muehl Chief Financial Officer James R. Rusche, Ph.D. Sr. Vice President, Research and Development Daniel P. Witt, Ph.D. Vice President, Operations m o c . s r o n n o c - n a r r u c . w w w / . c n i , s r o n n o c & n a r r u c y b d e n g i s e d This annual report 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 forward- looking statements in this annual report do not constitute guarantees of future performance. Investors are cautioned that state- ments in this annual report that are not strictly historical statements, including, without limitation, statements regarding current or future financial performance, regulatory approvals, management’s strategy, plans and objectives for future operations and product candidate acquisition, clinical trials and results, litigation strategy, results of litigation, product research and development, product efficacy, R&D 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, the risks identified in our annual report on Form 10-K and our other filings with the Securities and Exchange Commission. We assume no obligation to update any forward-looking information contained in this annual report. 41 Seyon Street Building #1, Suite 100 Waltham, MA 02453 (781) 250-0111 info@repligen.com www.repligen.com 

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