Repligen Corporation (RGEN) Earnings Call Transcript & Summary

Good morning, everyone. I'm Julia Qin. I work on life science tools and diagnostics team here at JPMorgan. And it is my great pleasure to introduce you to our next company presentation today, Repligen. As a reminder, after this session, there is a breakout in the Georgian Room. And with that, I would turn it over to Tony. Welcome.

Thanks, Julia. Welcome, everybody, and it's great to be here again this year. I just want to thank the JPMorgan team for giving us an opportunity to discuss not only the tremendous progress we made at Repligen in 2019, give you a little bit of insight to what we think is going to happen in 2020, and then talk a little bit about the next 5 years and what we view as the key part of our strategy as we continue to grow and take share in the bioprocessing market. So I think everybody knows we're now one of the leading players in bioprocessing. If you actually talk to our customers, they would tell you that we're one of the real true innovators that have emerged in the field over the last 5 years. And we've really done that by focusing on improving the overall efficiency of the manufacturing workflow, looking at productivity gains for our customers, looking at yield and using single-use technologies as a way to provide more flexible facilities. And we've created now this really good disruptive portfolio of technologies, and it spans the 4 franchises that we now have, from filtration to chromatography to proteins to our most recent acquisition in the world of analytics. And so if you look at our filtration portfolio, the products that we see that are disruptive, really, is the ATF technology, which has been in our portfolio for now about 5 years. We've moved it into -- from perfusion into the fed-batch parts of the market in what we call N-1. We just came out at the end of last year with a new technology called TFDF. It's really an exciting technology for the company because it's the first time that we're able to really move into 70% of the market upstream and fed-batch with a clarification and harvest technology. So we're excited about that. You're going to hear a lot more about TFDF as we go through 2020, as we go through Q1, as we bring some new products up to address that. In the world of chromatography, we're obviously known for our prepacked columns. And the prepack columns business has really had a boost in the last, I would say, the last 12 to 18 months coming from the gene therapy space. When we move into the world of proteins, we're probably better known for our Protein A ligands. But what's interesting about that business is, while we've been the market leader for a number of years from a technology point of view, we really haven't been the technology leader. And so about 2 years ago, we made the decision that we were going to invest in R&D, working with a company called Navigo, working with Purolite to bring next-generation affinity ligands to market, and we're really pleased with the progress that we've made. And again, expect to hear some more about that as we go through 2020. And then finally, in the world of analytics, it's exciting for us to have acquired a company called C Technologies. It's the first company that's really addressing protein concentration measurement and being able to do that in real time. And this is something that goes back, honestly, to the 1990s, when I worked at PerSeptive Biosystems, and we thought about real-time process monitoring in those days, and we were kind of ahead of our time. And it's great now to be able to see that we can actually do real-time process monitoring of protein concentration measurement using TFF skids systems, and expect, again, as we go through 2020, to hear a lot more about what we're doing in that space. So with this differentiated portfolio, I think the last few years have been incredibly successful for the company. If you look at where we finished in 2018 at about $194 million, we added over $70 million to the top line in 2019. Our organic growth north of 30%, which is -- we've been growing actually as a company on average over the last 5 years, 30%. Margins are going to be in the mid-50s, but you can see really nice expansion on operating margin, EBITDA as well. And just to give you an idea, in terms of number of people in the company, when I started in 2014, we had 120 people in the company. Now we have 760. So we've come a long way. And as diversified now as our portfolio is, we're really happy that we've also been able to diversify the application areas where we play. So in 2019, 85% of the revenue is coming from recombinant proteins, from vaccines, from the mAb world. But we also were able to double the size of the gene therapy market for us. We went from 7.5% in 2018 to 15% of revenue in 2019. And that's more a reflection of the portfolio of products that we have. They really do address a lot of the pain points in gene therapy. So the markets are strong, and what we're seeing that's going on in the marketplace, which obvious -- is obvious to everybody is there's really been a surge in clinical activity, which is driving a lot of capacity expansion plans for not only the CDMOs, but the large pharma companies as well, which has resulted in a very robust bioprocessing market, which we would estimate is around $10 billion in size. And if you go back to the clinical activity, if you go back a few years ago, we were talking about 45, 50 monoclonal antibodies approved. Now it's over 100. There's 550 mAbs that are still in clinical development. So that is a very healthy mAb market for all bioprocessors. Then in the world of gene and cell therapy, over 1,000 clinical trials, of which 750 are in gene therapy and 90% of those are in Phase I and Phase 2. And what we're seeing, and obviously, earlier this week, you heard from Catalent. You heard from Thermo around capacity expansion plans. So the big CDMOs are expanding the large pharma companies, biotech companies, whether it's Amgen or it's Novartis or even over in China with BeiGene, they're all expanding as well. So it's a very healthy situation for the whole bioprocessing tools space. And as I said, it's led to a very robust market in bioprocessing. So we estimate $10 billion, growing at 8% to 10%. So while the market's $10 billion, it's more important, really, to see where is Repligen playing in the overall market. And so we see this as a $2.8 billion market for -- the addressable market for Repligen. And the real take-home point here is that we don't have anything more than 20% share in any of the markets that we've played. So this leaves a lot of room for us to grow and expand, and obviously if you went back 5 years ago, we were very low single-digit percent of any of these markets. And so if you look at the chromatography space, its 20% share today, obviously, very much in prepacked columns. We grew in 2019 greater than 35%. And we're absolutely the leader today in prepacked columns. If you move down into the world of filtration, we have about a 10% share in the filtration market. Again, last year, the whole filtration portfolio grew north to 35%. And again, in terms of where we're leading with our disruptive technologies, we're clearly leading in the world of clarification and harvest and we're taking share down in the UF/DF space. In the world of proteins, I talked about it a few minutes ago, we have about a 10% share. We went through 3 years, '16, '17 and '18, where this business was relatively flat. Last year was a really good year for proteins. Really, we saw an uptick in ligand demand. But as we go into 2020, we all know that as GE brings some of their manufacturing in-house, we'll have a down year in proteins in 2020. And then finally, process analytics, as I said, the deal that we consummated in June of 2019. We've bought a 5% share, but we have technology that is the clear market leader in protein concentration measurement. And so we're very excited about how we're going to be able to do with that technology as we move through the next couple of years. So how have we performed as a company? So I came onboard back in 2014, and it was a very different Repligen in those days, in terms of who we sold to. Almost 72% of the revenue the company was being sold to was coming from 3 customers. It was Sigma, it was Millipore and it was GE. And so the goal that I really had and the set up with the Board was, how do we transform the company, go direct and really build a bioprocessing company for Repligen. And we've been able to do that. We're now -- we finished 2019 with 75% of the revenue of the company coming from direct customers, with 25% now in the OEM space. And so our growth rate over the last 5 years, on average, has been 30%, and we've also been able to increase our adjusted EPS four-fold in that time period. So I think we're executing well. We have a strategy that's clearly, how do you accelerate growth in a market where you have 5 really big players. And we've been able to do that through a combination of M&A and through R&D. On the M&A side, we've done 5 acquisitions now in the last 6 years. Those acquisitions have contributed about 40% of the cumulative revenue in that same time period. On the R&D side, one of the strategies we have, as we do acquisitions, as we look at products that we're developing internally at Repligen, we really want to bring next-generation technology to market that we feel can be disruptive in the space where we play in. So we brought about 12 products to market. And we're beginning to benefit from those products hitting the market in 2019, and what you're going to see as you go through at least the first half of this year is a significant number of product launches that are coming out of the investment that we've made in R&D. So these high-impact technologies not only allow us to play in the mAb space, but it allows us to enter into new markets. So we talk a lot about gene therapy, but we've also been able to get into the vaccine market through the acquisition of Spectrum and the very comprehensive and broad portfolio in hollow fiber technology. So as we do that, that just opens up a lot more opportunities for the company. And like every company, as we look to see where our opportunities are, we have to pay attention to our capacity. And so the last -- 2019 was a big year and 2018 as well in terms of scaling internally to stay ahead of demand. And so in 2020, you'll see that again with a significant amount of spend on the CapEx side as we see exactly where we need to go with our filtration and chromatography portfolios. So in general, I think we're really well-positioned not only in the mAb market but also recombinant protein vaccines and gene therapy. So in terms of digging in a little bit on the two-prong strategy here of M&A and R&D. On the M&A side, for us, the most important part of M&A is really sticking to the criteria when it comes to choosing the targets we want to go after. And so we've been very focused on technology leadership. There's always something about the companies that we're trying to acquire that we need to optimize. Typically, it's the commercial part. Sometimes it's the operational piece. We also look for targets that have margins that are in line with where we are as a company and that will be accretive within the first full year of doing a deal. So of the 5 deals that we've done, 3 of the deals have really helped us build up our filtration portfolio. So it starts really with the deal back in 2014 for Refine. That gave us the ATF technology. We then went ahead and did an acquisition of TangenX, which gave us flat sheet cassettes and got us into the downstream applications. And then more importantly, we did the Spectrum deal in 2017, which not only gave us hollow fiber technology, but more importantly gave us the systems portfolio that we've been able to leverage over the last 3 or 4 years. On the chromatography side, what we've really done is really work to see how can we double down on our OPUS business. And so we acquired a small company in Germany called Atoll, which got us into the process development labs, which are really the precursor to scale up into manufacturing. So that has -- that worked out very well for us. And then more recently, we did the acquisition of C Technologies. One of the things we like to do when we look at all these acquisitions is really start to measure what's the performance of these companies in the first full year after a deal. And you can see that we've been able to grow these businesses anywhere between 24% and 48%. And that's a real reflection of the team we've put in place. That's the -- a reflection of being able to identify which parts of these acquisitions that we need to optimize in the first 12 to 18 months. So that's gone very well for us. Obviously, the latest acquisition we did was C Technologies. Again, they are the market leader in protein concentration measurement. They hit all the criteria that we have in terms of execution on an M&A. Clearly, technology leadership, they need to get optimized on the commercial side. They had one salesperson really supporting with some distributors $24 million of business. So we knew that we needed to upgrade and add in additional people into the commercial work, which we've been able to do. And then in terms of where they play, traditionally, analytics are in process development and quality control. But in the last 12 months or so, this technology has moved into the formulation labs and on to the production floor and on the manufacturing side. And we're very hopeful as the FlowVPE technology gets more and more adopted, that this'll be a big driver for us. So great technology. The investment we've been making is really on the commercial side, and we expect a really good year for C Tech in 2020. Second part of the strategy is around reinvesting in these assets and bringing out next-generation products. So from an R&D point of view, not surprising with filtration being the biggest segment of our business that we've brought out a lot of products on the filtration side. So first thing we had to do with Refine was to bring out single-use ATF technology. That's done really well for us. It represents probably 30% of the total revenue for ATF in 2019. We've now bringing out next-generation controllers. We're working also with Sartorius to take the logic from these controllers and put it into their single-use bioreactors. We're also -- done a lot of work on the systems side that came from Spectrum. So you'll see cross-flow systems, both bench top all the way to large-scale that have hit the market. Flat sheet cassettes, which is obviously a very important part of the TangenX business. One of the things we wanted to do is really address the needs in gene therapy by creating a gamma-radiated version of this technology that hits the market here in January. And then TFDF, which you're very aware of, has -- we've technically launched that product in Q4, but obviously we feel very strongly about how that's going to perform in 2020. And we've actually developed systems around it, both bench scale and production scale systems to enable our customers to implement at a faster pace. On the chromatography side, it's really all about the expansion of OPUS that's been happening over the last 4 or 5 years. I've talked through what we're doing in process analytics with the VPE technology. And then finally, on the protein side, it's really been around collaboration. So we've got very important collaborations with Navigo and with Purolite that will allow us to build out our proteins franchise and allow that to grow once we get through 2020. So now while we're also thinking about what we're doing in R&D, I have mentioned earlier that we have to continue to think about how we scale the company. So a big part of what I was involved in over the last 4 or 5 years is building out the commercial team. It was 3 people back in 2014. We now have 135 people in our global commercial organization with about 94 folks that are external, probably about 60-plus selling and the rest in field applications, field service. We've also added in the appropriate level of customer service and product management marketing to be successful. Clearly, North America is where we have the most people, but we're clearly building out in Europe and in Asia. And Asia now has about 30 people in the field. R&D is going to maintain in that 7% to 8% investment range. In some years, it will be closer to 8%. It'll depend a little bit on where we are in the development cycle of the products, but expect that that's a typical range that we're going to be reinvesting in R&D on an annual basis. In terms of building our team, I mean it goes without saying that bringing industry experts has been an important part of the success of Repligen. We continue to do that. I would say, the most important thing we've been doing in the last 24 months, and we'll continue to do in 2020, is really around capacity expansion. So we've made some big investments in 2018 on building out our filtration centers of excellence in Marlboro. Last year, it was really around building out OPUS. This year, it's around OPUS and also about expansion over in California for our hollow fiber technology. We've created centers of excellence for everything that we do in manufacturing, and now we have 7 manufacturing sites around the world. So in summary, on the -- on where we see Repligen as we move forward over the next 5 years, we think our future is really bright. We've got great products. We're playing in a very robust market. We've got surging activity that's happening. We've got customers on the gene therapy side that are looking for our technology. We think the trends that are important in the industry today, whether it's adoption of single-use technology, increasing the flexibility in the manufacturing facilities, doing continuous manufacturing are looking for automation tools. I think we're very aligned with what customers are looking for. We're clearly aware of what's going on in the gene therapy space and the amount of investment in build-out that's happening there. And when you look at our products that we're lining up here in 2020 and beyond, we think these products really match up with what's needed in the industry. So whether it's the TFDF technology moving into fed-batch or it's our FlowVPE technology for real-time process monitoring of protein concentration to the multiplex ATF controllers to basically next-generation affinity ligands, all of these products are going to contribute to the longer-term growth at Repligen. So financially, obviously, we haven't announced our results yet. They'll be out at the end of February, but we're in that $267 million to $270 million range. Our gross margin's 56% approximately. Our expectation by 2023 is to get up to $500 million, $600 million in revenue. We clearly want to continue to expand our gross margins. We think there's a bigger opportunity to see expansion on operating margins. And with $500 million in the bank, where we did some financing last year, puts us in a strong position as we look at future M&As. So we feel very good about where we are. And I think in summary, we believe we're really well-positioned for sustainable growth. We have now 4 franchises, obviously built out these through a combination of M&A and the investments we've made in R&D. We've created a really powerful portfolio of high-impact technologies. We're taking share in the areas where we play. We've got an addressable market that's really increased over the last couple of years, now around $2.8 billion. We're expanding internally on capacity. We're adding the right level of people and the right level of expertise into the company. I think we have a good sense of what the real needs are in the industry. The R&D team is very active. And I think what you're seeing in 2020 is a real reflection of how much effort has gone in over the last few years since we made changes on the R&D side. And I think we've got the strong markets that are accelerating and really position us well for the future. And I think with $500 million in the bank and great technology that we've developed, I think Repligen is in a powerful place to execute and continue to take share in this marketplace over the next 5 years. So with that, I'd like to say thank you, guys, for attending, and we'll get questions at the breakout. Thank you.