Repligen Corporation (RGEN) Earnings Call Transcript & Summary

All right. Good afternoon. Welcome, everybody, to the Jefferies 2020 Virtual Global Healthcare Conference. I'm Brandon Couillard, I cover the life science tools in diagnostics sector here at the firm. Very happy to have Repligen with us back at the conference this year. Joining us for our conversation this afternoon, Mr. Tony Hunt, CEO; as well as Jon Snodgres, CFO. Thank you both for being here. I will say to anyone in the audience who's listening in, please feel free to e-mail me if you have any questions, and I'll do my best and let's try to work those in.

So maybe let's -- if we can just jump right into it, Tony, if think about the bioprocessing industry at a high level, about a $10 billion market, growing sort of high single digits. You've been growing double that rate organically for quite some time, did 33% last year. What are some of the key factors to think about in terms of your ability to sustain that above market growth? And from a macro perspective, what inning are we in, in this cycle for the industry right now?

Yes. So I think, Brandon, the changes we've made at the company over the last 4 or 5 years have really contributed a lot to the overall growth rate and above-market growth that we're seeing. So the diversification of the company, moving away from being 100% reliant on the proteins business and diversifying into filtration, into chromatography, adding in analytics. I think the big part of our story is that pretty much all the products we have are truly differentiated. We try and start off as a technology play and then moved that into more of a market leadership position. And I think when you have a vast majority of the products in your portfolio that are considered the standard in the industry for an application, that allows you to grow at a faster growth rate than the market. And I think that's what's really contributed to our overall above-market growth. And I would say the second factor is really the build-out of the commercial organization. So 7 people in 2014 to the 140 people now between sales, field applications, field service, product management, customer service. So that's made a big difference for us. And I would say the last part would be -- while I think our competitors are formidable in terms of size and scale, we're probably early innings at accounts where -- the big guys are probably at almost all accounts, they know all their accounts. They've got a relationship developed. Whereas Repligen, we're really -- probably in North America, we're in a fairly significant number of accounts. In Europe though, we're scaling; and in Asia, we're scaling. So it's a little bit like, I think, we have a little bit more runway to get into accounts than maybe some other companies. And so we're coming in with new technology that improves yield. So I think early innings for us. I still think it's early innings for the industry because I think the -- just the evolution of -- 5 years ago, 4 years ago if we were having this conversation, we'd talk about NOBs and biosimilars; now we're talking about NOBs, biosimilars, gene and cell therapy. And now even vaccines are beginning to come up in a more meaningful way this year because of COVID. So I think still early innings for bioprocessing. I think it's going to be around for a long time, growing at really good growth rates.

You mentioned cell and gene therapy, which was certainly, I think, a major contributor last year to the growth acceleration. It really became much larger part of your portfolio, I think about 15% of revenue on our math. Today, which product areas -- are you seeing the most adoption within your portfolio? What products are most suited for that market [ than ] one?

So the good news is that all our products actually match up pretty nicely into the cell and gene therapy space. But it's because we're focusing on viral vector manufacturing and plasma manufacturing. So when you think about viral vectors, most companies are working with AAV or with lentivirus. AAV tends to be predominantly in gene therapy and then lentivirus is on the cell therapy side. Plasmas, obviously, there are a number of companies that are doing plasma manufacturing. So when you think about those, basically, whether it's plasmas or it's vectors, you need to do some fermentation bioreactor work, you need to be able to clarify virus from debris, you need to be able to purify on the back end, you need to be able to concentrate. So all those things are things that we do and we do in the mAb world. I think the difference for Repligen is, I would say, our filtration portfolio has probably had the biggest impact or where we've seen the biggest impact because we have more products in filtration. Chromatography, OPUS has done very well in cell and gene therapy. Customers like the idea of having prepacked columns rather than packing their own columns. And so those are the -- probably the 2 areas where we've seen the most traction. It doesn't mean that the other parts of the portfolio, like analytics, won't have a place in cell and gene therapy over the coming years. It's just a matter of expanding applications for some of the other technologies in our portfolio.

Can we maybe dig into the chromatography side of your business with OPUS? Last year, you doubled the number of columns that you shipped in 2019 to like [ 1,400 ] or so, largely due, I think, to demand from the mAb side, but also cell and gene therapy customers. Can you sort of talk about the penetration of OPUS in different -- be it customer accounts or applications, and maybe the runway you still see for that product? I mean, we've been talking about OPUS for 8 or 9 years.

Yes.

And I think, it still seems to have quite a bit of legs to it, just wondering where that's coming from?

Yes. So if you remember back to those days when we talked about OPUS in the beginning, I think I was saying prepacked columns is a little bit like the disposable bioreactor space. And so that was something that really started to take off in 2004. And I thought there was easily 10 to 15 years of really strong adoption of the technology, just like what you see with bags going into bioreactors. And so as people started to use prepacked columns, I think the last couple of years really kind of the pivot point for us, especially last year, when you double the total number of columns shipped out, that's really a sign of broader adoption in the industry. And I would say early years were the CDMOs using prepacked columns. I think the last few years, we've seen an uptick in the large biotech pharma companies using prepacked columns. And probably also the gene therapy space where probably 20%, 25% of our quarterly revenues now are coming from gene therapy customers. And they have no sort of preconceived thoughts on prepacked versus self-packed. They just like the convenience. And so there's less resistance than you might see at large pharma to using prepacked columns. So that's actually played in our favor. So yes, I know it's been a good business for us. We expect it will grow 20% plus on average in the outyears. And one of the big pivot things that Jon and myself have been doing over the last couple of years is moving away from the resin side of the equation for OPUS and making this more of a column play, which obviously will improve overall margins for prepacked columns as we move forward. So we're seeing that in North America and in another year or so, we'll start to see that in Europe.

Can you remind us of what your capacity expansion plans are for OPUS kind of the next 3 years and just sort of where you are in terms of doubling that capacity?

Yes. So last year was a big year for us, obviously. One of the challenges we were faced with in 2019 was just really dramatic increase in demand which put some stress on our operations. So our lead times went out, so that by second half of last year, we put a concerted efforts to really increase overall capacity. So by the end of -- by early this year, I think we're up around 13 production suites versus 7 maybe at the beginning of 2019. And right now, I would say, with COVID, it's probably delayed things a little bit. I would say probably by the end of Q1 next year, we'll be close to that 20 suite capacity and really looking at -- we've also been putting in second shift. We've also been optimizing production, sort of unit operations that would be more efficient. And so all of those things come together that we've put in more of a 2- to 4-year capacity plan in place versus maybe what was in the past, was a 1- to 2-year capacity plan. So I think we're in good shape. Expect us to continue to grow and expand. We'll have a European presence, we'll have a North America presence. But I think most of our capacity increase will come from -- in the future from second shifts and from continued automation of different parts of the manufacturing workflow for prepacked columns.

Maybe if we just look at OPUS overall, can you just remind us the size of that market opportunity, where you think penetration is? Is the TAM actually bigger than you initially thought it was? And to what extent, given it's such a differentiated product, you're able to take a lot of pricing on it?

Yes. So the market is pretty interesting because we're obviously playing in sort of preclinical Phase I, Phase II. And with the addition of the 80-centimeter OPUS, it moves us into the Phase III. And for some more -- for some of the recombinant protein drugs that don't use large chromatography columns, you get into some of the commercial processes as well. So from that point of view, we estimate the total TAM is probably in that $300 million to $400 million range. It's changing a little bit because the TAM really doesn't reflect right now the impact of cell and gene therapy. It's just such an early industry, right? And if you think about it, you've got 1,000 clinical trials out there between cell and gene therapy, vast majority of them at preclinical Phase I. So my expectation is that OPUS TAM will continue to increase and probably increase fairly dramatically as the scaling at the cell and gene therapy happens. And so as that happens, there are opportunities for us, obviously. And I think that will -- that's where we'll be able to take some significant share. And what makes it difficult to put a total dollar amount on it is, a lot of people today, whether it's in gene therapy or it's in mAbs, it's not really a battle of Repligen, GE and prepacked columns, it's really a battle with customers wanting to do it themselves versus having a service from a Repligen or a GE doing it for them. And I think we have a real opportunity in the cell and gene therapy space to have the vast majority of that customer base move to prepacked columns over time.

Can we maybe just step back and then come out with the first quarter report, you were one of the only companies that I follow, not to pull guidance for the year, kept the top line outlook the same, upped margin a little bit. Can you sort of talk about the impact of clinical trial delays, the potential risk of clinical trial delays? Do you have better visibility today than you did, let's say, a month ago on that topic? And help us understand kind of the lag between when manufacturing is completed and when a clinical trial actually starts?

Yes. So I'll start with kind of guidance and our rationale for holding guidance for the year. I mean, when you look at what happened with the lot of other companies and -- just in the life science tools space, they clearly saw slowdowns on the order side in late February, definitely in March. And then given that most companies reported out second half of April, they were seeing the same sort of slowdown happening through April as well. For us, we didn't really know when everything hit what the real impact was going to be for us. But March turned out to be the strongest month in the first 3 months of the year in terms of orders and April was the second strongest month. So we didn't really have any data to suggest that we were seeing a slowdown, plus, obviously, we have visibility to the first half of the year, and we have conversations going on with our customers around what their requirements are and needs are in the second half of the year. So we felt that while we were cautiously optimistic about the second half, we feel like we're in good shape. And then on top of that, the GE, now Cytiva, especially in the month of March and April, put in orders here for Q2 that were significantly up from what they had originally forecast, which was all sort of COVID-related, building inventory levels at their customer level. So if you take the increased revenue coming from there, plus, yes, a little bit of softness in some parts of the business. But offset by the strength we were seeing in not only in proteins, but in a couple of other areas, we felt that we were -- we feel fairly confident about our ability to execute on the $309 million to $319 million for the year. And then as Jon has said, we definitely slowed down a little bit of the hiring as we went from Q1 into Q2. And so that's -- obviously, we'll see a little bit of a pickup, obviously, on the OpEx side based on doing that. But between that, travel restrictions, there is some cost that normally would flow through that just won't happen. So that will add to the overall kind of operating margins for the company. So based on that, that's kind of why we did have some of the raise. And we feel pretty good about our sort of $309 million, $319 million. Now here we are. We've gone through April, we've gone through May. The one thing -- the few things that have happened in the last few months. One is China, Korea has definitely picked up. We saw it in the second half of March, we saw it all through April. We also are beginning to see other countries in Europe and some of the companies here on the East Coast, West Coast, the U.S. beginning to pick up. We know that the CDMOs are having a really strong year. And we don't think customers are going to cancel -- if a clinical trial itself is getting delayed and that company is using a CDMO, it's unlikely that they would cancel a production run, given how long it takes to fit into a slot. So we think that most companies are trying to stay the course in terms of their manufacturing. And there is about a 6- to 9-month lag between when you finish manufacturing of a drug and before it ends up in clinical trial. So we'll be keeping an eye on the Q4 clinical trials and if some of those are getting moved out or delayed. But for now, we're not seeing a whole lot of -- we're not seeing any cancellations, and we're not -- we're seeing some push-outs on production campaigns, but 1-month, 2-month type push-outs, not 6 months, 9-month type push-outs, okay?

Yes. Yes, you probably had this question 1,000 times a today, but I'll ask it anyway. I realize it's very early in terms of assessing the potential vaccine opportunity. I think it's somewhere probably around 10% of the business, correct me if I'm wrong on that. But to what extent are you sort of embedded with many or any of the leading vaccine candidates for COVID? And maybe you've begun to sort of -- how do you help us? Can you help us sort of pencil out ranges of what it might mean to Repligen?

Yes. I think it's too early to put a dollar amount on it, but I do think what we will see is that, for those accounts that we've been able to get into will be a tailwind in the second half of the year, but not a huge tailwind. I think it will -- for those that continue to go through Phase I, Phase II, Phase III and into commercial, obviously, 2021 would be bigger demand, right? So I definitely see COVID vaccine and opportunities that are going to go out over the next 4 to 6 quarters. What happens after that is kind of hard to predict. We're not going to get into opportunities where we're not known at an account today. It's just -- people are moving too fast, and so they're going with what they know. And accounts where we are well established and people use our technology, our platforms and our technology, we have a better shot at getting some wins there. So we are definitely playing in vaccines. We're definitely playing with some of the diagnostic companies. And we're definitely in some of the mAb opportunities that are COVID related. But I think mAb, anything that's a treatment is going to take a little longer. I think the first trials are going to probably happen this summer. So the scale-up and the speed that companies will scale for say mAb processes might be a little lag, a little bit behind what's happening with the vaccine piece. So I think you're reading a lot more about vaccines. We're obviously seeing a fair amount of activity around vaccines, but I don't -- but I think when you get into second half of the year, you'll start to see probably an increase around the mAbs as well as more companies start to get into those Phase I. But I think from a revenue point of view, I think the biggest revenue impact will be in 2021.

Jon, a couple of financial questions for you. I mean, companies historically talked about kind of a 10% to 15% organic CAGR, you've beaten that at least 4 out of the last 5 years. Why is that the right number? Is 15% to 20% actually more realistic? And on the operating margin side, I haven't seen much multiple expansion. Granted you've had plenty of areas to invest, and you've gotten good returns on those investments. But when do you think we begin to see some leverage, great leverage on the operating line?

Yes. So we can start with the organic growth. This year, we're 11% to 14% is what we guided, which is obviously close to that longer-term guiding range of 10% to 15%. Some of the headwinds that we're looking at this year, in particular, one of them was the GE situation, right, where we expected their revenue to come down somewhere between $12 million and $13 million for the year. Yet, we still guided an organic growth rate of 11% to 14%. So I think that indicates the rest of our business, our direct product portfolio, et cetera, is growing faster than -- a bit faster than the market. So kind of gives you a sense of where we're at there. In terms of longer term, how we look at that, we'll continue to look at it every year. We've had some evolution, obviously, of gene and cell therapy, and those have given us a boost over the last couple of years. And we'll continue to evaluate that longer-term rate, but that's kind of where we're at today. And until we give further guidance on that, we're positioning our business there.

Maybe, Jon...

Yes.

Maybe one just for Brandon on the 10% to 15%. I do think that the impact of the new products that are -- that we're bringing to market puts us at the higher end of that range on a go-forward basis. So that, to me, has been a big part of what we've been trying to do over the last few years is get more products through our R&D pipelines. First year, we've launched 5, 6 products, this year going to get launched. That's going to allow us to grow at a higher end, 13% to 15% type range going forward.

And then in terms of operating margin expansion, Brandon, I'm just looking at some numbers here. Back in 2018, we were about 20% as we absorbed the Spectrum business. The last year, we finished at about 23.5%. This year, we said we'd be somewhere between 23% and 24%. So we've had some nice expansion over the years. I think our mid- to long-term goal that we've stated is to be above the 25% level on adjusted operating margin. And so that's our position right now, where we're trying to get to. We think we can get a 20, 30 basis points a year of organic gross margin growth, and we do think we can get some expansion on the operating income level from our SG&A over time. The growth has come at us pretty fast. And as we've talked about on other calls, we're trying to stay 3 to 5 years ahead of the market demand. It gets tough when you have crazy years. But -- like we had last year, where we grew 33% organically. But that does require us to put costs into the business and it requires us to put capital into the business and expand facilities and footprint and everything else. And so our primary mission has been to make sure we're staying well ahead of capacity. And generally, the financials will take care of themselves if we do that and then -- as the volume comes.

Tony, maybe one of my last questions. Big picture. Clearly, the outlook for bioprocessing is, I would say, strong to quite strong. I asked Merck KGaA this question earlier today and got a long pause. I'm curious just, in your view, what derails the industry growth? I feel like it's usually excess capacity, overbuilt capacity. But what sort of derails the macro story for the market right now in your view?

I think you're right. It might be capacity, although I don't think that -- I don't think we have a capacity issue right now where people are overbuilding. The whole cell and gene therapy space could be a huge catalyst, right? If you go back 10 years ago, it just didn't exist, now you've got biosimilars and cell and gene therapy as additional catalysts into a bioprocessing market that's traditionally grown at 8% to 12%. So I don't know if there's any derailers beyond you're going to have the odd year where there's a inventory readjustment that the end users do. I think this is a really stable high-growth market for anyone who's playing in this space. I just don't think the next 10 years will be any different than the last 10. We got frozen out?

I think we're...

There you are. You froze for a while and I'm like -- okay.

I got there 2 days, but I didn't....

You didn't like the answer? I wasn't sure.

Well, I think that's all the time we have. So thank you both for being here.

No problem, Brandon. Good to see you.

My pleasure.

Good day. All Good. Yes.

Thanks, guys.