Repligen Corporation (RGEN) Earnings Call Transcript & Summary

Thank you and good afternoon. This is Jack Meehan with the Barclays Life Science Tools and Diagnostics team. Pleased to be joined now with Repligen and glad they are joining us in this virtual format with CFO, Jon Snodgres, as well as Head of Investor Relations, Sondra Newman. Thank you, again, and Jon, Sondra, would you like to make any introductory comments?

Yes, we sure would. Thank you, Jack, and pleasure to be here, and thank you guys for continuing the conference virtually. So quickly, I'll give you an overview of Repligen. For those of you who may not know this -- know us, Repligen is a leading innovator and supplier into the fast-growing bioprocessing market, where we supply products to large biopharmaceutical, CDMO, gene and cell therapy, and other types of customers on a worldwide basis. The overall bioprocessing market that we look at is about $10 billion annually and is expected to grow at an 8% to 12% CAGR through the year 2022. So it's a healthy and growing market, and it includes drug classes like monoclonal antibodies, recombinant proteins, vaccines and gene and cell therapies. If you peel back the onion a little bit, Repligen competes in about $2.8 billion worth of this market today, and we participate in the areas of filtration, chromatography, process analytics and proteins with the direct aim of improving the efficiency and effectiveness of our customers' manufacturing processes. And continuing with the strong growth that we've driven over the last several years, Repligen drove organic growth of 33% in 2019, leveraging our strategies of bringing disruptive technologies to market through both internal R&D and M&A and through continued development of our strong global commercial team. I think we've also positioned ourselves very well in our filtration and chromatography businesses to support the manufacture of viral vectors and plasmids in the fast-growing gene and cell therapy markets, which has really given us a healthy boost in revenue over the last few years. I think at the same time, we continue to build out our global commercial and customer support organizations, and we've been heavily engaged in the last couple of years in scaling up our production capacity to ensure we're well positioned to accommodate expected growth over the next 3 to 5 years. And you can see by our track record of delivering strong revenue and financial results that we have a very good formula for success, and we look forward to executing towards our long-term goal of becoming a $500 million to $600 million company by the year 2023. So a brief overview, and I'll hand it back to Jack. Thank you.

Great. Yes, thank you, Jon.

I wanted to give you an opportunity just to weigh in on the main focus for everyone in the market in the recent days related to the coronavirus. As you think about managing the business, what's top of mind for you? What impact do you think you could see? And maybe just talk about the supply chain exposure, that would be helpful.

Yes, sure. So top of mind for us is, obviously, continuing to look after our employees, but also make sure that we can keep our facilities open and shipping. In terms of overall impacts on our revenue, February 20, 2020, we guided $309 million to $319 million in revenue for the year 2020, and this guidance assumes no impact whatsoever from COVID-19 at that time. We said back then that we'd have a better idea when we get to May. And certainly, we've seen things materialize with quite a bit of escalation happening in Europe, now here in the U.S. And so we have site action plans in place. Our sales teams are very actively engaged with our customers, keeping them informed and managing with customers, and we continue to monitor and manage the situation closely from all aspects. I think specifically, our internal focus, really, we've got sites all over the world, and our focus is on keeping employees safe, as I mentioned, and keeping our manufacturing and logistics open and running to make sure that we can support our customers. And similar to other companies, one of the key areas that we're focusing on as a company is minimizing the foot traffic into our facilities and trying to make sure that we can minimize exposure to the infection. Up to this point, we've experienced minimal disruption from supply chain issues or manufacturing challenges associated with the COVID-19 virus, and hopefully, we can continue to manage in that way.

Great. Yes, thank you. One of the things, I think, a lot of tools investors have been stewing on is that once we get past this, there's actually going to be a lot of investment in life science research. So we're just curious what -- how do you think the portfolio is positioned for a potential rebound? Maybe talk about some of the work going on in vaccines or antivirals. How are you positioned to maybe help address some of those needs?

Yes. So what we know today is there are many, many companies working on vaccines and other therapies around the coronavirus. It's early days right now. We don't know what and who will be successful and will continue to move forward. But certainly, we do expect, over time, there's going to need to be a scale-up and we're going to need to supply products. As for COVID-19 rebound, we've got a great portfolio of products, really designed to support all areas or many areas of the biologics, including vaccines, which tends to probably be an area that will have an uptick due to COVID-19. So we've got great products, ready, willing and able to expand our pipeline and deliveries. We've been making investments in capacity. So I think we're in a very, very good position to be able to support the needs of the market as we go forward.

Great. Then maybe turning to an end market perspective. Obviously, a lot of focus with Repligen on the biopharma end market. It's been a real growth engine for our coverage. So I have to ask, what are your latest views on kind of funding and expectations for the end market growth and for the areas that you serve?

Yes, great question. The funding concept is a bit more of a shorter-term impact and really doesn't significantly affect Repligen in the short to midterm. Longer term, those types of activities will definitely have an impact on us if funding increases, in particular. But we look at the overall bioprocessing market, and we expect the outlook to remain strong, with projected growth, as I mentioned earlier, in that 8% to 12% range for the overall market on average. We continue to see and have continued to see for the last few years, strong pipeline and approvals of monoclonal antibodies, that includes biosimilars as well. As well as a lot of strength in the emerging gene and cell therapy markets, which have all nicely accelerated over the last few years. So we, again, think that our portfolio of products and as demonstrated by our growth and our businesses are well positioned to support the customers and their manufacturing needs as overall biologics continues to expand, and we feel pretty strongly that that's inevitable to happen.

Great. Yes, and maybe just digging into that point a little bit more related to cell and gene therapy. That's been a big focus area in terms of some of the new innovative therapies coming to market. As you look at your portfolio versus some of the peers, where do you think you're most differentiated for those customers?

Yes. I think as we look at it today, just to give a little bit of background on where Repligen is positioned, gene therapy accounted for about 15% of our overall revenue in 2019, and that was really a doubling in that percentage from the prior year. So very significant growth there for us. The growth indicates that we have the right products, obviously, to help our customers address the needs in the manufacture of viral vectors and plasmids, which are the -- really the delivery mechanisms for the treatments in gene and cell therapy. And in particular, the products that we're very well positioned on today are in our filtration and chromatography portfolios. And these basically comprise almost 100% of our revenue today in gene and cell therapy. And we believe these products, along with some developments that we may be able to do in our process analytics product line are and will be the well-suited products for us going forward. But if you just kind of look back at the overall revenue on a year-over-year basis, we've more than doubled the gene and cell therapy revenue in 2019 from 2018. So that gives you a pretty good indication how strongly we're positioned.

Great. If I reflect back, I think, on the first time I met with Repligen a few years ago, the business has changed a lot over the years and certainly diversified, though I think the roots always kind of go back to Protein A and that's done remarkably well recently, kind of despite the GE insourcing. Can you maybe just talk about kind of the underlying strength and where you stand in that GE transition? And what kind of growth looks like beyond that?

Yes, sure. So the GE situation, the insource that they're planning on doing with some of their ligands this year, really is supposed to start in 2020. So it didn't really affect the overall 2019 revenue. So that's a good precursor. But as we look at success in '19, we look at it over the -- a little bit over the longer-term horizon. And so from the period of 2016 through 2018, in those 3 previous years, our proteins business was effectively flat. And so we didn't see any growth there. So now, we come into -- came into 2019, we grew at 20%. It was really the first year in 4 years that we had seen growth in our overall proteins business. And ligands drove a chunk of that growth and that was generally driven by overall market. There's always ebbs and flows of inventory build and burn and such, but the overall market drove that growth. And we also had a nice upside coming from our growth factor business, which really is in that cell culture formulation of upstream phase, and that business performed very well for us as well. But I think one of the keys, Jack, to point out here as we move forward. The proteins business for us represented about 76% of Repligen's revenue in 2019 and those sales coming from filtration, chromatography and process analytics. So we've been really successful in transitioning our business to reduce some the reliance on overall proteins and on a couple of very large customers. So we've significantly reduced our reliance on proteins. It's still a very important strategic business for us. But it's nice to see that we've got more legs on the stool than we once had, and that goes right in line with the strategy we've been communicating over the last 5 to 6 years.

Great. Yes, that makes sense. One of the areas that kind of started in terms of the innovation was with the OPUS line of chromatography columns. Maybe just talk about the runway there for demand and I think you doubled the number of columns in 2019, where are you taking share from?

Yes, it's a great question. We did, in fact, double the number of columns in 2019, going from 700 columns roughly in 2018 to 1,400 in 2019. And the growth is really coming from stronger market demand in mAbs and gene therapy, but it's also coming from our CDMO and large pharma companies scaling up with OPUS, moving into larger scale clinical trials as well as them realizing the value of a prepacked column versus a self-packed column. And so when we look at this, most of our growth is coming from the large biopharmaceutical companies saying, hey, I think there's real value here in prepacked columns, so I'm not going to self-pack anymore. So we're really kind of creating that market and taking that out of the self-packing, which has been excellent for us, and it's been a great growth story over the last 5 to 6 years. And we believe, right now, we're very, very well positioned in the market. Our breadth of offering exceeds any of our competitors. Our customization and willingness to pack any type of resin that you could think of, whether it be for a gene therapy application or a vaccine application or a mAb application, gives us real advantage. We'll pack to any bed height that the customer wants, any compaction ratio that they want. So we're really customized to suit what they need. And that's really been a differentiator for us. And so we think that business will continue to do well into the future. And I think we're well positioned to hit our overall growth targets of 20% plus in OPUS this year.

Great. Maybe just moving -- sticking on the downstream side, you also built up a nice position in the filtration business. Just what's been the kind of -- how did you build this position? Just talk about versus peers the level of what's driving the growth to get to 25% in 2020.

Yes. So filtration has been a great story for the company. And if you took a look back at us at the beginning of 2014, we didn't have a filtration business at that time. So middle of 2014, we started in filtration with our acquisition of the ATF product line from Refine Technology, and we've been building that ever since through both M&A as well as internal R&D. And so the way we're positioned right now, we've got a very strong portfolio of both hollow fiber and flat sheet filtration products. That's rare to have both of those types of filtration in your portfolio. And we've got a very active R&D team that continues to deliver disruptive filtration technologies into the various classes of drugs, manufacturing, including the gene therapy side, which is growing exponentially over here -- over the last couple of years. I think some examples that I can give you of where we're doing well are ATF and TFDF hollow fiber systems and filters that are basically, combined, are providing our customers clarification and harvest solutions for both perfusion and fed-batch upstream manufacturing applications, where previously, we were just competing in the ATF space and that was largely around perfusion. We now have the TFDF offering, which is allowing us to hit a much bigger piece of the market. So adding those types of products in are helping us. We've also continued to develop single-use flat sheet filters that are providing optimal performance and benefits to our customers in the downstream side. So we've got nice coverage, both upstream and downstream. And then also, we just continue to see high adoption and penetration rates with our customers as they basically drive clinical production and scale up opportunities and activities. And they love the flexible single-use, easy-to-use applications that we have basically across all of the areas of biologics. So those products have been well received. And I think with our -- with both our -- the good work we've done on M&A as well as the R&D engine that we have as well as our strong commercial presence that we have around the globe, I think we're really well positioned to hit our 25% growth target this year. And the business just continues to perform well.

Yes, great. And then maybe just talking -- continuing on in terms of the deal front, announced -- did the C Technologies deal last year. Just give us some perspective on the value that brought to the portfolio and how you're helping them expand the commercial reach.

Yes, sure. So this business -- we love this business across a variety of fronts. We love the technology that we acquired. C Technologies, they've just been a great group to work with as a company. And that's been our entry really into the process analytics space. So it continued to allow us to diversify our overall portfolio. Through 2019, revenue as well as the financial performance has been right in line with our deal model expectations. So they continue to grow well. And one of the areas that we're -- as Jack you mentioned, that we're investing in this business and trying to drive more growth is, in 2020, we're trying to hit a growth target of 25% in this business, which is -- exceeds where they've been in the past. And we're doing this really through investments in the company. The first being investments in our global commercial team, where this business has slightly different call points today than some of the call points that we have. So it's in the -- it's more in the labs and a little bit less in the manufacturing -- bioprocessing manufacturing process. So we've expanded from 1 rep back in May 2019 up to 10 reps today, and we're getting those reps up to speed, and we expect to get meaningful traction in sales from those reps here in the second half of 2020. Once they get up to speed, they learn the products, they get to know the customers, et cetera. So I think we're going to see nice growth from that. We see excellent value in the margin profiles in this business. Both the gross margin as well as the operating margin are nicely -- or above our corporate averages. So we're very pleased with that. And I think one of the things that gets us really excited about this business is the view to the future and the advances that we're making and working with the FlowVPE system, which is really providing, for the first time, real-time in line protein concentration measurement capabilities to our customers that help them improve speed, accuracy and convenience in a way that they've never had before. And so by automating a lot of the activities, we feel like this is going to be a real value adder to them in the process as we move forward. Now the immediate impact is probably not going to be here in 2020 for this particular investment that we're making, but we think this is going to be a major contributor to long-term growth in this business and it's going to be pretty revolutionary for the industry.

Yes, great. Maybe just you talked a lot about different areas of the portfolio, is there anything else that you would want to highlight, whether it's new products or opportunities that are going to be important to the thesis in 2020?

Yes. Yes. And so what -- we've talked about innovation and internal innovation being a key pillar and a key driver of our strategy and our organic growth as we go forward. And that's certainly not changed, and we don't expect it to change in the future. In 2020, we've got 5 significant product launches expected, which is a large number for a company our size, these are -- including our TFDF systems and filters that I've mentioned; our new ATF controllers that are going to be coming out, that are -- they're going to be fantastic for the customers; more gamma -- CS gamma flat sheet filtration technology that we're launching; the next-generation FlowVPE systems, which is the in-line system that I just mentioned as well as new ligands that we're going to be introducing. So it's going to be a really busy year for us in terms of product launches and R&D execution. We're pretty excited about that. But at the end of the day, to kind of close out on this question, the blueprint for growth that we have is consistent, continue to drive meaningful long-term growth from a combination of both organic activities as well as acquisitive opportunities. And we think these technologies are just great examples of products that we can bring to market that give us a strong platform to drive organic growth into the future. So I think we're well set for the long-term with these. These -- most of these launching this year are not going to have huge revenue impacts in 2020, but their longer-term impact is going to be significant. And we certainly like to balance the short and long-term views as we execute the business.

Yes, that makes sense. And as you look at last year, obviously, throughout the year, you drove some nice upside on organic growth. And I think investors have been trying to tease out in 2020, maybe what the level of conservatism is in here since it builds in a bit of a deceleration. Just can you walk us through the factors that build up to that 2020 guide?

Yes, I'm happy to. And anybody that's looking at our organic growth last year of 33% for 2019 is probably asking that question. So appreciate you raising it. I guess I'd ask you to keep in mind and investors keep in mind that in Q4 2019, where we had some tough comps, we grew at about 21% organically in the Q4 period. So if you kind of step back and take a look at our guidance, which is 10% to 14% for next year, take the midpoint of that at 12% and then add on about 5 percentage points for GE insourcing impact that we're expecting and we've been pretty good about communicating that to folks. You take that midpoint plus the GE impact, that kind of balances you to implied growth of about 17%, absent the GE impact and that's at the midpoint of our range. That's compared to the market growth of about 8% to 12%. So we think that 17% is reasonably close to how we exited the year at 21% in Q4. And I'd say, obviously, we're a bigger business. So it gets tougher to grow at those rates. It's off a much tougher revenue comp. And so as we look at that, we view it as a pretty reasonable and appropriate projection for the organic growth for next year.

Great. And then maybe just to round up the discussion in the last minute, I want to focus on the deal front. Maybe given some of the -- you've been a nice consolidator over the years, has any of the volatility in the market changed your desire to do a deal in the near-term or the pace of deals?

Yes. So I don't think we've seen any change in pace or any change in valuation. This whole coronavirus situation has come on us relatively quickly. So I don't see things have changed in the short term. We're continuing to be out in the market. There are opportunities in the market that meet our, what I call, strict acquisition criteria of being technology must be differentiated and we must be able to obviously make that technology an industry leader over a short period of time, strong operating margins, accretive to adjusted EPS and obviously having an organization that has the ability for us to really move the needle with some of our expertise, whether it be commercial or operational. So those things haven't changed. Our diligence towards completing deals, integrating acquisitions and our track record, we have no intent to change that into the future, and we're going to continue to look at things. We're actively involved. And at this point in time, we just haven't really seen any major impacts from coronavirus to that.

Understood. Okay. Thank you, Jon. Thank you, Sondra. I appreciate you participating, and hope to see you soon.

Awesome. Thank you, guys.

Thank you.

Bye.

Bye.