Repligen Corporation (RGEN) Earnings Call Transcript & Summary

Hello, everyone.

Hi, Jon. This is Sondra Newman. And I'm filling in for the moment for Dan, who I believe is tied up with a keynote speaker, but we do have some questions for Dan that I'll pass along to Jon. Dan, if you join at any time, feel free to just step in here. So I think what is on everyone's mind and we're fielding a lot of questions about COVID and the impact on Repligen, the impact on our operations, the ability to keep manufacturing facilities open. And just generally, how this might be shifting demand for our products? So very -- in a very big picture, Jon, could you comment on how things have changed at Repligen with the pandemic?

Yes. Sure, Sondra, shall I open up with the -- with an overview, a little bit of an overview of the company, and we can jump into the questions?

Absolutely. Sure. That would be great.

So I think that would be good in case there's any new folks on the line or people that haven't been in touch with the story over the last little while. I'm Jon Snodgres, I'm the CFO here at Repligen, and I appreciate this opportunity to take a few minutes to give you a short overview and update on Repligen. I'd also like to refer you to our investor presentation that's on the Repligen website, which contains more information on the company and the topics of this overview. Like many businesses in the world today, we've been laser-focused, over the last few months, on ensuring the health and safety of our global employees. And at the same time, we've had to continue to deliver products to our customers and support the manufacturer of important and essential biologic drugs to make -- and as well to keep internal projects moving forward in the company. So now shifting back over into the business overview. Some of you may not be familiar with the company. Repligen is a leading innovator and supplier into the fast-growing bioprocessing market. And we supply really value-adding products into the large biopharmaceutical CDMO, gene and cell therapy and other customers around the world. The overall bioprocessing market that we serve is about a $10 billion annual revenue market and is expected to grow in the 8% to 12% CAGR range through the year 2022. So participating in a really healthy and growing market today, including drug classes like monoclonal antibodies, recombinant proteins, vaccines and then the fast-growing gene and cell therapies.

So Jon...

Yes.

Jon, I jumped on. Sorry, it's Dan. And I apologize. We're still working out the kinks. This is Dan Brennan. The keynote ran a few minutes late, and I kind of didn't realize the tight shift over to get to you. So I had emailed Sondra, so very much apologize, but I know you've already kicked off with some lead-in overview, but maybe we could toggle to Q&A, and then we can always obviously come back to some of the higher-level kind of views for the company, if you don't mind?

Okay. Not a problem.

It's awesome. Well, thank you for that and obviously thank you for joining us. We appreciate it.

So maybe just -- I think maybe the lead-in before we dig into some of the unique products that Repligen has and kind of characteristics and maybe some of the long-term opportunities. Obviously, I think I'd like to start on COVID just because it is so acute in near term, and who knows how much long-lasting. But I think an obvious question, I'm sure you're getting throughout the day and leading up to the -- through the quarter, which was, how is COVID both impacting you negatively and positively? And I think maybe we could start more so on the positive front. I think there's a view trying to dissect the vaccine opportunity for CDMOs and some of the tools' vendors. So how would you characterize your positioning today with the vaccines that are in development? And how might this play out for kind of Repligen dependent upon which vaccines are the ones that get approved and then get used?

Sure, sure. So obviously, Dan, a ton of activity going on in the markets today around COVID vaccines around therapeutics, around diagnostic test kit development and things of that nature. And as we look at that overall span of the market, we're -- in certain accounts, we are platformed with our technologies, and in other accounts, we are not platformed with our technologies. So like everybody else, we're working with the customers that we know well to ensure that we're spec-ed into any of the other vaccines or diagnostic test kit manufacturing or any clinical activities related to the therapeutics. So we continue to work closely with our customers. We have seen activity. We are starting to receive orders for Phase I, Phase II early stage COVID-related activities and business. And we continue to evaluate the overall market, right, to make sure that any pull-ins and things that are rapidly coming to fruition within the COVID side. Are we seeing an offsetting impact in Phase I and II clinicals of different products? And our understanding is it's a challenge for customers to rearrange and CMOs to rearrange manufacturing lines for changes. But we continue to monitor that to see how that's going to over -- going to affect us overall. But we do expect modest business coming from COVID here in Q2, Q3 and throughout the year.

And then on the flip side, I know you've given some quantification of the near-term impact, but it's always interesting to try to dissect between the clinical trial slowdown that we've seen and commercial activity. Looks like it's seemingly kind of continued rather unabated from the comments from public companies. But on the clinical development side, maybe just walk us through what impact you've seen and kind of how the lead lag occurs between a clinical trial, a biologic drug being produced -- when that occurs? And when and if we would see the impact of these delays that have occurred on Repligen's business?

Yes. So typically we see that a customer would be buying product from us 6 to 9 months ahead of a clinical trial actually taking place. So within that 6- to 9-month period, they'll be buying product with -- around that 6 -- 3- to 6-month period, they'll be manufacturing product. And then there's 3 to 6 months until the clinical activity actually begins in the market. So that gives you some sense of -- we would expect if we start to see certain delays or postponements or even cancellation of existing Phase I and Phase II activities that we should start seeing those heading into the summer here and then through the third quarter. As of our earnings call on May 6, our order book had remained strong overall. And we really had not seen any real detriment aside from some maybe pushouts of orders within the year because of the COVID situation.

Interesting. Okay. And when you think about like geographically, how -- obviously, China and the Far East are hit first and now they're opening back up. Could you speak a little bit to whether or not there's a predicate towards -- between China and U.S. and Europe between how China was impacted, and U.S. and Europe, obviously, you just mentioned, you really haven't seen much of an impact to date. But maybe just speak a little bit geographically? And what's kind of assumed within your guidance for different regions, if you get into that level of detail and kind of how COVID has been a negative out in China and now maybe how it's started to come back. Maybe just some color about the pace of that improvement, if you will?

Sure. So as we went into Q1 and we did our earnings call in February and gave our Q1 guidance, we had some visibility that there were some challenges, particularly in China at that time. China represents about 5% of our overall business. And we had communicated at that time. We thought we could see a $1 million to $2 million headwind from COVID-19, specifically because of China. And of course, what we saw at that time was the COVID-19 situation expounded, started hitting more countries over in Europe -- or excuse me, in the Asia, India region. And as we came out of Q1, we actually did see about $1 million to $2 million of headwind, but it, in fact, came from China as well as India. And so that was a little more widespread than China. Of course, earlier this year, we started seeing a situation where Europe became more affected in countries like Ireland and some of the bigger economies in Europe started being affected. And certainly, overall in the U.S., we were affected. We did see, in the first quarter, a pickup in orders that's really going to help bolster the first half of the year in our overall proteins business. And that particular business, most of that business actually is sold into Europe. And so we did see a little bit of a pickup in the European region in the first quarter, which more or less offset and more than offset the situation we saw in China and India. I think as we go forward, we see the Asian countries coming back online. We see business returning. We see they're opening up facilities. I think in the U.S. now we're getting to a point where people are starting to reconsider opening businesses back up, and I think that applies to Europe as well. I think the best thing that we can do from our perspective at this time is continue to monitor our order intake across our various product lines as well as regions. We're strong through April, as we communicated, on our call a couple of weeks ago. And we do expect some benefits from some of these COVID-19 vaccines and therapeutics that are coming through and test kits. But we also are, I think, being prudent in terms of looking forward, just to be careful about what activities might be canceled, right, in Phase I, Phase II, as we come up through the next 6 months of the year. So we've held our overall guidance. But at this point, we're optimistic that all countries are going to start coming back. And some of those -- 3-month, call it, 3-month delays that we've seen over in Asia may now apply into Europe and the U.S. But we're watching closely to see how that actually plays out.

Got it. And you mentioned the strength in the protein business. So what is driving the unexpectedly strong demand for that business for your ligand business?

Yes. So the proteins business coming in the year -- into the year, we expect it to be down about 15% compared to 2019. And this was largely predicated on an expected 50% reduction from Cytiva, which would have been about -- between that $12 million and $13 million range, and we expected to partially offset that with a combination of our growth factor business, our NGL-Impact A that we sell to Purolite, along with other OEM providers like Millipore. And so in the first half of the year, we've seen a nice pickup and really across all elements of our proteins business, be it Millipore, be it GE or be it the Purolite business that we've had. So that's been a good story for us through the first quarter, and again, through the first half. I will say with all that's going on there, we expect in Q2 there to be some level of stockpiling. And so that's part of the play here and going through the first half of the year. But overall, with the proteins business, we've gone from expecting to be down about 15%, now to being down only 5% to 7% for the full year. And again, this is largely, I'd say, driven by all customers within that portfolio. And the only other thing I'd like to just reiterate on the protein side, is that we do have a sound strategy in place, which includes continuing to support our OEM customer, but also includes our key partnerships with Navigo and Purolite where we're obviously owning the IP and the technology around that ligand as we go forward. So we're really pleased with our strategy, it's working out well, and we do have a sound strategy in place for the proteins business overall.

And maybe since we're on proteins, I know that -- and we haven't done much work on this aspect, but I know Avantor, I think, is a new entrant in the Protein A market. Just -- is -- any color about the competitiveness from that product? Or just how -- I know switching costs are very high, it takes a while, but like how do you think about them or just the broader competitive landscape?

Yes. I mean that's pretty new information that they released a product. We really don't have any -- a lot to say about that. I will say just in general, though, with the proteins business. It's a long lead time business. It takes a long time to get spec-ed into to clinical processes. Everything has to go through process development, be analyzed. It's got to fare well and compete well. We think we have a great portfolio of products here. And so we think we're obviously well positioned for our proteins business going forward. But we can't really speak to Avantor and what they've got going on at this point.

Got it. So I definitely want to hit some of your exciting product categories. Maybe just staying at a high level, just -- gene therapy, we did a report back in March, we're going to do a call later this week with a gene therapy expert just to discuss the kind of manufacturing process. Where -- what's your relative exposure to gene therapy producing these viral vectors versus the traditional monoclonal antibody business? Maybe if you want to address some of the unique products you might have that fit one or the other. But just -- and I'm sure this comes up quite often, you probably have slides in your deck on this, but how do we think about your relative exposure to both of those markets? And what is the growth in gene therapy? Like how are you positioned from that opportunity?

Yes. It's a great question. So we've guided 10% to 14% organic growth this year overall. That included the headwind, right, that we talked about from GE as well. And the gene therapy component, obviously, is growing faster than most other parts of our business. Gene therapy at the end of 2018, represented about 7% of Repligen's overall revenue. At the end of 2019, gene therapy represented about 15% of the company's revenue. So if you do -- it's not hard to do the math there, it grew at over 100% in the year 2019. So it's a really fast-growing market. It came up quickly over the last 2 years and has a lot of steam behind it. And so we're well positioned there. Most of the products that we have that work well in vaccines, that work well in monoclonal antibodies port nicely over into gene therapy and can be used in that area as well. And plus, anything that we do in areas that we're working on like our gamma-irradiated cassettes and things like that also have a place specifically in gene therapy and closed loop manufacturing systems. So we feel like we're well positioned. Our portfolio -- obviously, our filtration portfolio, both flat sheet and hollow fiber are well suited there along with our systems. Obviously, we play well in the chromatography side there. So it's a great market for us. Our expectations this year, our gene therapy should grow around 30% for us this year. And that was in our original guidance back in February, and we remain at that level expecting a nice 30% growth. You mentioned monoclonals at the beginning. Monoclonal antibodies, a much more mature market. Monoclonals represent roughly 60% of our overall business. And obviously is a huge driver of the overall program. But I would say because it's a much more mature market. There are many, many candidates or many other candidates in both clinical as well as commercial manufacturing. The overall growth in that business is going to be not clearly as quick and as rapid as the gene therapy area. So hopefully, that answered your question, Dan?

Yes. When you think about -- I mean the FDA talking about 2025 approvals, I think, by the year 2025, obviously, as you go from clinical to commercial, could be significant. Can you just remind me, I forget implicit in some of the long-term numbers that you've kind of mentioned some long-term goals. How have you tried to factor in like the volume increase that the companies are clinical to commercial switch? Any way to characterize the future opportunity to the extent a lot of the clinical development is successful in terms of the commercial products? I mean gene therapy side that is, Jon. Yes.

Yes, so that's -- that's a -- yes, on the gene therapy side. I mean that's a question that remains to be seen. We don't have specific information from our customers exactly what products they're using, how much product they're using, or what drugs, et cetera. I think it -- obviously, there's going to be a nice opportunity for growth and scaling from clinical to full-scale commercial. And if you look at our entire portfolio, we're positioned in a similar way -- maybe not quite as much, but in a similar way to the way we're positioned in gene therapy today, which about 2/3 of our overall product volume, I mean, that's even inclusive of proteins, which is more heavily weighted to commercial. But about 2/3 of our overall product volume is tied to clinical. So I think that's one of the nice things about Repligen. Many of our technologies are newer technologies in the space. And that gives us a nice opportunity to be able to ramp up for our positions in clinical all the way up through commercial manufacturing. So I can't give you any real numbers on that, Dan, it's a great question, but I can tell you that, obviously, it certainly puts quite a bit of wind in the sales for growth down the road.

And maybe just one kind of a little bit deeper on gene therapy, if you don't mind. Just when you think about some of the approaches upstream between adherent and fixed bed bioreactors and suspension, stirred tank reactors and others, maybe shifts from one or the other over time to drive some better economies of scale. But are you better positioned for certain of those types of associated virus manufacturing processes or are your products kind of equally applicable across the various different approaches that companies are taking today and will pay?

Yes. If Tony was here, he'd probably give you a more novel answer. But I think overall, we're quite well positioned across all of our filtration and chromatography businesses that are in gene therapy. We're also working with -- I think there's potentials around -- potentials around our process analytics franchise as well. But I'm not probably the right technical person to suggest that it's better than the other. But I think based on what we've seen, our chromatography and filtration businesses are really nicely positioned, I'd say, more or less across the board.

Okay. Maybe back to kind of guidance. And can you just remind like what's implicit when you think about the growth to the different pieces of your business, when you think about the growth that you've laid out for 2020? You've talked about the ligand business already, but how about the other parts of your business, kind of what's baked in? And any particular areas of strength or kind of softness right now as we kind of consider the next 3 quarters for 2020?

Yes, sure. So I can -- I think maybe the best way to do this is to walk through the different franchises that we have. As you know, Dan, between our initial earnings call in February and our call that we just had here in May, on May 6, we held our overall revenue guidance at $309 million to $319 million for the year. And some of the puts and takes that we've seen that have come to that conclusion are proteins, right? Proteins first. We've moved the overall forecast from proteins down to negative 15% growth, down to a range of 5% to 7% negative. So we're seeing a bit of a pickup there in the overall proteins business. And that's coming from really all of our OEM customers. If I look at filtration, obviously, that's an area where Tony talked about. There -- we do have some products that are a little bit more tied to R&D labs and quality control labs and different areas like that. The overall filtration growth number has come down from 25% expectation in February, down into a range of 20% to 25%. So that one's dropped down a little bit based on some of those lab-based products that represent more or less 15% of our overall revenue. On the chromatography side, we basically remain constant in our growth expectations at about 15%. And that includes our OPUS product line within there at about 20% for that product line specifically. So that's maintained pretty constant. And then the final product line here that I'll talk about is our process analytics line. That one, we had originally estimated 25% growth. We're now looking at a range of around 20% growth. So that's roughly a couple of million dollar drop in that particular product line. And that's really because of our challenges in terms of being able to get into facilities, labs aren't open and key decision makers, frankly, for -- at this current time, are not really in those businesses to be able to make those technical decisions to take on those products. So that's our overall take in it. But we were pleased at the end that we were able to hold our guidance at $309 million to $319 million with all those puts and takes considered.

Got it. Okay. And in terms of profitability, I know gross margins were really strong in Q1. And I know that there's this ongoing shift or benefit that you have in terms of these columns that get packed and how they get packed. Maybe just speak to a little bit about kind of near-term profitability what you see this year? And just kind of as we look ahead, what are some of the bigger drivers towards -- or just how we should think about profitability evolving? Obviously, year-to-year with M&A, it's going to change, but what have you committed to? And how do we think about your profitability this year and beyond?

Sure, Dan. So I'll start with Q1, and then we'll kind of weave it into the year. I think one of the big drivers in our Q1 profitability being more positive than the overall consensus was within our gross margin. And gross margin did come in at about 58.5% on an adjusted basis. This was above what we had originally guided in February, which was more in that mid-50 -- 55-plus percent range. And some of the key drivers there, we had a really strong start to the year on our productivity programs in the company. And we also had a really strong overall operational performance in the company. So that in itself put a strong benchmark for us in terms of overall margins. And then we saw an overall positivity in mix, which included nice leverage in our OPUS business from that column to resin ratio that we've talked about a lot. So a much richer portion of column revenue versus resin revenue there, which was better than we had originally expected. And then finally, our proteins business coming in stronger, at least the order volume coming in stronger, benefited on a mix basis from overall margins because of mix. But also, we were able to push more product through our manufacturing and gain an absorption benefit overall in our factories from having those higher volume expectations here as we -- in the first half of the year in particular. So that's really the key drivers of Q1. How that transpires into the full year? We actually raised our overall gross margin guidance by about 100 basis points. So we went from a range of 55% to 56% up to 56% to 57%. And considering how that obviously came about, obviously we were able to bank the really positive operational performance that we had in Q1 and some of the mix benefits. So that was good. But we're also continuing to look at our timing of hires and everything else like that. And so we are now believing and projecting in our full year gross margins that our first half of the year gross margins are going to be about 200 basis points better than our second half of the year market. And that's all based on mix, that's going to be based on absorptions, some of the proteins pull into the first half of the year. But also some of the hirings now being deferred in the second half of the year. So we've shifted from expecting a stronger first half -- excuse me, a stronger second half to now having a stronger first half because of all those dynamics. And we're going to continue to watch those and provide updates to you guys over time here as we go through the year. But I'd also say this has also dropped down not only from gross margin into the operating income line, where we've also raised our expectations to 23% to 24% adjusted operating income, again, based on this gross margin strength that we talked about.

Okay. Maybe we got about 7 minutes left. Before we go M&A, between the TFDF, excuse me, TangenX and kind of additional product launches or kind of new product launches this year. Just -- I think investors are pretty well aware of kind of these unique categories. Maybe just step back a little bit and how should we be thinking about what's really unique in the Repligen portfolio? And maybe what, if anything, are investors missing about some of these products and the opportunity sets ahead?

Yes. So I think the way we've tried to build the company, Dan, is we tried to make all our products unique and best-performing products in the market. And so our strategy has been and continues to be, not to specifically target and go after areas where there's other competitors deeply entrenched in those markets to try to gain market share. We really pushed our products and focused our products on solving major customer problems and challenges in their manufacturing process. And really trying to drive niches into these markets where other people aren't playing. Great examples of some of the new products that are coming in this year. Our TFDF filtration in our Q2, we have our TFDF benchtop system coming out, it's just going to go into process development. Those particular products really go into fed-batch manufacturing and will very likely displace a lot of the old messy painful debt filtration steps that the customer has to deal with. So that's a great example of differentiation there. Our ATF systems, enabling our customers to have much higher yields in their clarification and harvest processes. Another example of a differentiated product, which really didn't have any specific competition previously, and we've been able to drive that wedge into the market and create our own space there so that we don't have to compete. So those are a couple of different examples. I think one more, which I think will be easy to throw out here is our FlowVPE system and software. Today, continuous monitoring is probably not something that's all that present in the overall manufacturing lines in terms of protein concentration measurement that is. And so our new FlowVPE systems can be put in the line. Right now, it's specifically targeted to a limited number of areas. But what are the potentials we can do with that down the road remains to be seen. But that's another particular product that is differentiated in the space. So hopefully that gives you a sense?

No, it does, it does. So maybe 2 final ones in the final couple of minutes here. First off would be, M&A remains an important part despite all the excitement from your current portfolio, it remains a, I know, an important part of the Repligen story. So is it fair to think every 12 to 18 months another deal? And kind of -- I know typically you'll give some high-level views about areas that are interesting, but maybe can you speak to that aspect of the strategy?

Yes. Well, you know my boss. Yes. M&A is absolutely going to be a continued part of our strategy. It's obviously going to be driving organic growth through internal R&D processes, acquisitive growth through M&A and then further growth, which will turn out to be organic of additional developments on those companies that we've acquired. So a huge part of the strategy and will continue to be so. In terms of areas of particular interest to us, I think anything that's along the lines of bioprocessing -- we like to typically stay within our sweet spot, what we're good at. And so I think initial thoughts are anything that's in filtration, chromatography, process analytics, which is a little bit newer to us, but it's certainly not new to Tony and some of the people in the company, are areas that we're going to be keenly interested. But we also would be interested in looking at different opportunities within our proteins business as well should those come to fruition. And that doesn't mean we'd shut the door on something that was maybe an adjacency to bioprocessing. But typically, we've pretty much stuck to our knitting in this area. And my guess would be that's probably the areas we'll stay in.

Got it. And then maybe just -- I mean there's so much excitement over the products and the growth opportunity. But what do you worry about, if we got out of a year or 2 and some reason the Repligen story wasn't working. Like what are the biggest concerns investors should have on their radar, whether it be competition, whether it be some significant shortfalls maybe in some of the clinical trials for cell and gene therapy? Just what are the types of areas that are kind of on the negative side of the ledger or just the risk side of the ledger for Repligen?

Yes. No, fair question. I think as you look at gene and cell therapy, right, one of the things that could keep people awake at night is, are these going to go smoothly? Are we going to wake up one morning and have some of these gene therapy applications causing major problems? That has not happened to date. And -- but it's certainly something that's newer, right? It's a little less tested and proven, obviously. And so that's probably an area that I think people should think of or would think about. I think the other one, if there's a massive global recession of major significance, we could see that certain large biopharmaceutical companies maybe burn down some inventory, things of that nature, which would have an impact on us. Maybe not as significant as it might on some companies, but our proteins business, in particular, is probably more heavily weighted -- significantly more heavily weighted towards commercial. And so those types of things could have an impact on our industry, albeit maybe with us maybe a little bit less significant than some others. But -- or in a global recession, would certain clinical trials be canceled, postponed, whatever the case may be, that could certainly have an impact on us as well as other companies in the industry. But I will say, if you look at our industry over the last, call it, 10 or 11 years, we've had -- we've really had just 2 down years, right? We've had the down year in 2009, coming off the biggest financial crisis. Well, maybe I'll be restating that. But historically, the biggest financial crisis since the Great Depression. And then that 2017 I think time frame, where there was some softness in our industry as some of the biosimilars were coming into play. And we saw some of the large biopharmaceutical companies bringing down their safety stocks on some of their historical drugs. Those are the areas that I can think of, Dan.

Great. Well, Jon, [ apologize ] for joining a minute or 2 late, but glad that you could be with us today and look forward to staying connected in the future.

It's always a pleasure. Thank you, and thanks, everybody who joined us today. Appreciate it.

Thanks. Bye-bye.

Bye.