Repligen Corporation (RGEN) Earnings Call Transcript & Summary

All right. Good morning. Unless you're on the East Coast, then I guess it's good afternoon. Welcome today for the Stephens conference. I'm Jacob Johnson, life science tools and diagnostics analyst. As always, very excited to be joined by Repligen. Today, we've got CEO, Tony Hunt; CFO, Jon Snodgres; Global Head of IR, Sondra Newman; and Manager of IR, Steve Chehames. Before we get started, if you would like to submit a question during the presentation, there's a button on the top left of your screen where you could submit questions. You can also e-mail me at jacob.johnson@stephens.com. With that out of the way, Tony, maybe to kick things off, if you want to spend a couple of minutes giving us an update on all of the exciting things going on at Repligen right now.

Yes. Thanks, Jacob. And maybe as a kickoff on this, obviously, everybody knows, and they've heard us, over the last few weeks, talk about our overall earnings where we just came off a very strong third quarter for the company with $94 million in revenue, up 31% year-on-year. Obviously, benefiting from all the activity going on in COVID, our direct product or orders were up 100% in the quarter, so with half of that coming from COVID programs, the other 50% coming from non-COVID programs. In general, we've executed across the board. We've been able to do 3 deals now in 2020, all focused on the system side of our portfolio, really trying to double down in terms of what we have for our systems, for our filtration products, chromatography products. We've also done some vertical integration with our -- with fluid management. So the EMT, NMS deals definitely give us further supply chain strength and also gives us a stronger portfolio in what we call fluid management. Our deal from 2019 and C Technologies has had a really good year. We were able to build out the commercial organization. We've been able to really do a nice job this year of executing on bringing new accounts into the fold, expanding the applications for the C Technologies portfolio into gene therapy and a little bit into COVID as well. So that's gone very well. The other initiatives this year has been continued traction in gene therapy. We formed a core business development team that's really worked with the sales force. We expect gene therapy for the year to be up over 30%. And then finally, we've been working on new products, right? And so we've been able to get our TFDF technology out at the beginning of the year. That's gone well. We've got next-generation FlowVPE launching at the end of the year. Our new controllers for ATF are out. We've got some ligands coming through. We did a nice job with Navigo on getting a spike protein ligand done for COVID. So I think we're really well positioned for the future. And I'd say the last piece of the story for this year has been around our investments in capacity. So we look at capacity in a number of ways. We look at it from a people point of view where we've increased the number of employees in Repligen by 30%. Obviously, some of that's coming from M&A. We've done a really nice job. Jon has led the way on this in terms of the SAP Phase II implementation, really important that we got that done. That's gone well. And then, obviously, we're adding in building out physical capacity. Last year, it was all about OPUS and ATF. This year is more around our filtration portfolio. We'd like to be in a position where we can titrate people in as opposed to building large facilities. So that's kind of the goal. As I said, I think we're really nicely positioned heading out of 2020 into 2021 and ahead of our long-term goals that we set back in the 2016 time frame, as you know.

Perfect. A lot of things to follow up on there, but let's maybe start with COVID-19. Can you just walk through where you're seeing demand for COVID-19 vaccine and therapeutic work within your portfolio of products. I think it's largely filtration but also chromatography and proteins, but if you could just unpack that a little bit.

Yes. So maybe what we'll do -- maybe as the year has evolved, I think when we started off in Q2, our proteins business definitely benefited mainly because I think customers started to -- on the Protein A resin side, which has a -- which flows all the way through to our ligands business, people started to increase their inventory levels because of just concern on product availability in the long term. And then that business has also continued to do well as the therapeutic molecules begin to come through for Phase I, Phase II, Phase III. So that's definitely the driver on the protein side. You're right about our filtration business being probably the one part of our portfolio that has benefited the most from COVID. And that's across the board. It's our, call it, fiber business. It's our flat sheet cassette. It's our systems. And it's been pretty consistent really Q2, Q3, Q4. And then we saw in the middle of Q3 that customers started to ramp up on prepacked columns. We haven't seen that. Prior to that, we had definitely had some orders for prepacked columns for COVID, but we definitely saw a significant uptick in activity around prepacked columns starting mid-summer, mid-August, heading into September. That's kind of maintained over the last few months. So most of what we're working on is vaccine related. Definitely, activity in the therapeutics as well. But I would say the majority of our projected $35 million for the year will probably be related to vaccines. And obviously, that includes some of the protein stuff as well that's from our proteins business.

Got it. I mean I think maybe the logical follow-up to that is we've had some questions about which of these vaccine programs you're tied to, especially, I think, as we're starting to see data read out on these. I know you don't talk specifically around customers or programs, so maybe I'll ask it this way, given what you're seeing in terms of COVID-19 demand, is it fair to say you're working with a variety of customers on both therapeutics and vaccines right now?

Yes, absolutely. And the majority of our customers are clearly on the vaccine side that were involved in COVID. And we are working on mRNA protein and viral vector-based vaccines. So as those modalities do well, it's a positive for Repligen. We're not in every single one of them, but we are working with a number of players in this space. So -- but we expect that next year our COVID revenue will come from companies that are still scaling to companies that will come through and get commercial approvals.

Got it. Maybe a follow-up on that last comment, just on COVID-19, at a high level, where do you think customers are in the process of scaling manufacturing? It seems like it's early innings. And if we get some of these approved, then there's an additional ramp from here. But as always, I'd be interested in your perspective on that, Tony.

No, I think that's the right perspective that you have. I think it's early innings. People are clearly scaling and ramping, and people are assuming success. But depending on how many companies have therapeutics for COVID or have vaccines for COVID will determine a little bit of the demand profile that those companies will have to manufacture against. So we have 2 players who are in the vaccine space that's going to create a very different demand dynamic for Pfizer and Moderna versus if there are 6 or 8 or 10 companies who are producing vaccines. So I think we'll know a lot more through the first quarter of next year. And I think for Repligen, when we get to our earnings call at the end of February, we'll have a lot more insight into what 2021 could look like.

Maybe just one quick follow-up on that. I mean I think -- I've gotten the question what does it mean -- what does the Pfizer and Moderna data mean for activity for others? My sense is nobody is slowing down activity right now but would be interested if you have any thoughts on that.

No, we haven't -- the players we're working with are all forging ahead, right? And I think if you're already committed to a Phase II or Phase III, you're not going to stop it because somebody else is getting to potentially emergency use, right? I think companies are moving forward. They want to see what their vaccine or therapeutic program is going to yield. So that's why I said -- I think when you get to the end of Q1 next year, I think the playing field will be a little clearer.

Okay. That's interesting. So when you reported third quarter earnings a couple of weeks ago, you talked about 100% order growth in your direct product portfolio. Can you just talk about the lead times for these orders? And maybe how we should think about those orders translating to revenues over the next, I guess, several quarters probably?

Yes. I think if you went back a couple of years ago, we would typically, in a quarter, your -- by the time you hit the middle of a quarter, your -- the sales team is working to get all the orders for the following quarters. So they're beginning to pull those into our sort of order bucket. What's changed this year is just the whole dynamics of COVID, right? And we've seen a step function change on the order side since -- as Q2 was kind of winding down, it's really ramped up in Q3. And so that -- and you're right, 100% order growth for our direct products, I think 80% for our total portfolio in Q3. In terms of timing, I mean there are orders that are going out into -- clearly, in Q1 and some even in Q2. So there's a little bit of customers. Depending on whether you're a COVID customer or a non-COVID customer, I think there's a clear demand cycle for the COVID customers. They know what they need, and they know what they need by when. For the non-COVID customers, I think there's a little bit of fear that all the demand is going to get sucked up and there's nothing left for anyone else, right? And I'm talking about the bioprocessing industry in general; or the lead times go out. So I think people are ordering a little further out than they normally would. It's not stockpiling. I think they're just placing orders knowing that, hey, if we need this at the end of Q1, why shouldn't we place the order now. So there's definitely some of that going on as well.

Got it. And then with all of that demand, you mentioned adding capacity. Can you just remind us where capacity stands today? And then as you look out the next couple of years, where do you think the key areas are for adding additional capacity?

Yes. So it's a journey, honestly. We'd like to be in a position where we've built a lot of the physical capacity that we need to build for our product lines and really more -- become a little bit more focused on a people titration issue rather than, oh, we got to build a brand new plant to be able to double or triple the capacity of our product line. So we started that journey, honestly, well over a year ago, 1.5 years ago. And as we saw the ramp-up in prepacked columns, we knew what we needed to do there. So we focused last year on doubling down in our Waltham facility and getting a lot more capacity in place for our prepacked columns. We're continuing that journey this year, but it won't come online until next year to have a European facility for prepacked columns. So I think we've done a good job there. We did a very similar exercise for our ATF single-use product line last year and built -- we transferred it out of Waltham, moved it into our Marlborough facility where had more space. And so we've got a lot of the physical capacity there. This year, we just took the -- a lease on another 64,000 square feet. That's right -- adjacent to the 64,000 that we have right now in Marlborough. So that gives us a much bigger footprint, frees up -- it'll free up space next year to continue to expand our systems portfolio. It will allow us to expand ATF. It will allow us to expand a lot of our filtration product line. So all of that is really positive. We're -- on the other filtration products out in Rancho, we're continuing to -- we have started last year to build out excess -- not excess capacity but built out more capacity. That's kind of executing right now, but we're actually increasing what we want to do in our hollow fiber portfolio. Again, that's going to take probably until the middle of next year for us to take the -- get the physical capacity and equipment in place that we need. And then from there on, it becomes sort of a people -- how many people do you add and when do you add. And we get asked a question a lot about are you -- if you ramp too fast, is that something that you're going to be concerned about down the road if COVID happens to be a 9-month, 12-month spike. And I think the answer to it is we're not. We just think that the industry is really growing at a good rate. And there's -- even if we build capacity and we have -- it takes us a few years more to fill that capacity, we don't see that as a bad thing because we think the industry is doing really well.

Yes. I want to get onto some non-COVID stuff at some point because, to your point, Tony, there's a bunch of interesting things going on outside of COVID. But maybe one last one on COVID, you've got this ligand with Navigo for COVID-19. I think this is probably an opportunity maybe in next-generation vaccines rather than as first wave. Can you just comment on that?

Yes. That's exactly right. I mean we're in the middle right now of scaling that ligand and making the resin, and so it's going to take until -- we expect to have that available in Q1. It's unlikely it's going to get into anything that's going on right now in COVID vaccines that are protein-based. But next-generation versions, we expect there will be some interest. So not a huge amount, it's not a lot of revenue next year, but I think in future years, it's a great product to have because I think it's going to make a difference.

All right. So we've done COVID, maybe talk to me about some more interesting things. Your opportunity for COVID is interesting. Tony, you've done 3 deals this year: EMT, NMS and ARTeSYN. Can you just maybe just set the table, talk through those deals and what they brought to Repligen?

Yes. So in general, we really looked at our strategy. I would say, it really evolved from what we did with Spectrum, right? So once we did the Spectrum deal, we saw what they were doing in terms of systems and consumables. And as we built a whole business last year around the people that we needed to add in to drive the business, and we built out our manufacturing capabilities in Marlborough, all of that has been very positive. But we also realized that we were only really addressing the hollow fiber component of what we were doing. And so as we sort of started off 2020, we had kind of a game plan, could we execute on the ARTeSYN deal because we've been working on it for a little while. If we could, that would give us systems in both filtration -- downstream filtration. It would will give us systems in chromatography. And then by doing the EMT, NMS deals, we were able to get the fluid management piece. And people don't really think about consumables in the same way. If I say consumable to you, you would say, oh, is it resin or is it a filter. And people forget about the fact that what we call ProConnex or fluid management is also a consumable. And so what ARTeSYN brings to the table is single-use filtration and chromatography systems. So not stainless steel piping but silicon tubing is the piping. And now we have the ability to make that silicon tubing through EMT. We can put all the assembly, the collection vessels and bottle-top assemblies through what NMS does. And then ARTeSYN itself, you have all that fluid management for flat sheet cassettes, for chromatography. We've already got the fluid management for hollow fibers. So it gives us a consumable plan. So when we think about chromatography where it's much harder to go out and acquire a company right now that is a true chromatography resin company because there's very few that are left, we felt like a way for us to play even further in chromatography and build off the success of OPUS was to have chromatography systems and fluid management consumables that would give us some additional leverage in that market. So that was the thinking. That was how -- why we executed the way we executed. And I think it puts us in a good position as there are some really important trends coming through in our industry. Whether it's semi-continuous or continuous manufacturing, ARTeSYN brings very accurate gradient systems into play for chromatography. They have very low hold-up volumes so you don't have a lot of yield loss on your product as people process their production stream using their system so, all in all, I think a good place for us.

So you mentioned these deals build out your system strategy. I think this is something you've been pretty clear about in recent years. But it's always helpful to be reminded, why is having these systems so important for your customers and such a priority for Repligen?

Well, I think from -- I think if we had gone back a few years ago, maybe we would have said we're not going to be able [ to do ] the consumable, let somebody else deal with the system piece. But after we solve what we were able to accomplish with the Spectrum systems from benchtop all the way to production scale and having the fluid management component, it became clear to us, you get multiple touch points with the customers. So you're not only in talking to them about the consumables, but you're also talking to them about the system. You're also putting benchtop systems into the process development lab, and so you're training people to use our technology. So for me, it's around the touch points with the customer. It's around, in a positive way, influencing the customer on what we bring to the table. It gives you more shots at goal. Why not have the razor and the razor blades, right? We've had a lot of razor blades, but we haven't got many razors, so why not have that? And the piece that's most important here is what we're doing isn't me-too, right? So ARTeSYN is not a me-too portfolio of products. It's actually the market leader in high-end filtration, chromatography skids. And they're highly differentiated versus what other players have. So for us, it builds on our core strategy of technology innovation, technology differentiation. And I think the more customers see of us and interact with us, the better it's going to be for Repligen longer term.

So I guess the follow-up there, you did these 3 deals this year that kind of beef up your systems capabilities, do you think you now have most of the critical elements for a system strategy in place? Or are there any other kind of gaps here that you could look to fill in at some point?

I think we have the majority of what we need, but there's always gaps, Jacob. And we've talked about what's our strategy around M&A. And honestly, we have a strategy in our proteins business. We have a strategy in analytics. We have a strategy in filtration. We have a strategy in chromatography. So if you do a deal in filtration, it's probably going to have an impact on what you do with systems down the road. So you would probably have never -- we would never have made the connection between C Tech and ARTeSYN 2 years ago. But now that we own both -- or once we get the ARTeSYN deal closed out completely but, in 2021, all those assets are in place, you can start to see how you can connect the dots. And I don't know if you would have -- we would have looked at the playing field 2 years ago, 3 years ago and said, oh, yes, if we do this in C Tech and this in ARTeSYN, we can have an even more integrated chromatography or filtration skids.

Maybe on the ARTeSYN side of things, I think you called out $10 million of synergies over several years on that deal. I don't know if Jon wants to address this one, but maybe could you walk through how we should think about the timing of those synergies and maybe what they include?

Yes, the only comment I'd make on it is, look, the most of it is channel because they have no sales team. But the big kind of winner, I think, from a product line point of view will be our flat sheet cassette business. So it's a combination of channel and flat sheet cassette synergies that are going to come. And I wouldn't expect anything in 2021, but it will be sort of 2022 and beyond.

Jacob, maybe I'll just add to that since you called me out on it, too. I mean a great example is where we're selling OPUS columns, right, into the customer, that's a really great opportunity to leverage those touch points and our promise in OPUS columns and be able to sell the systems and bring those through as well. So that's an example of where that selling takes place.

Thanks for that, Jon. And then also, I think on the opportunity at ARTeSYN, Tony, if I'm not mistaken, there's an opportunity -- they've got a really good technology, but there's an opportunity to invest in their sales force and also leverage your existing sales force. If that's correct, it seems like a playbook you've used before but maybe kind of comment on that opportunity as well.

Yes. We like assets with no sales team, with really good revenue and margins. So if we can find those, it's -- it doesn't take a rocket scientist to figure out, oh, this is the investment that should really help us. So look, in the case of ARTeSYN, I think it's a little bit like C Tech in the sense that the technology is really well reviewed, and customers really like what they've been able to do. I think maybe ARTeSYN is much earlier in the adoption cycle. So C Tech had the SoloVPE, and it was really the gold standard in the quality control labs whereas ARTeSYN is working with a handful of accounts that have really started to adopt their technology. I think by bringing them under the Repligen umbrella, there's a little bit of less anxiety maybe at the customer level that they're kind of jumping in bed with -- that is a small company and if they don't survive, what happens with the technology. So I think that's a positive, that it's part of Repligen. They've been successful through word of mouth as opposed to really sales commercial strategy, so we do need to look [ in where we have ] our specialists, and this has been the nice part, is we've been making the investment in systems and system specialists over the last 1.5 years, 2 years. So we'll look to add a few more specialists so we have the right coverage in Asia and North America and Europe. And then the rest of it is really around funnel management, funnel development, the consumables that would come out of EMT because EMT is one of the biggest suppliers into ARTeSYN on their consumables side. And then just spending first half of next year getting the funnel straightened out and then similar playbook to what we've done with some of our other deals.