Repligen Corporation (RGEN) Earnings Call Transcript & Summary

Good morning. This is Paul Knight, the analyst at KeyBanc covering Repligen in the life science industry. Welcome to the Repligen fireside chat. We have Tony Hunt, CEO of Repligen; Jon Snodgres, the CFO; Sondra Newman of Investor Relations; and Steve Chehames in Investor Relations as well. The format will be just a brief overview from Tony on the business, and then we'll -- I'll run some Q&A. But for people who are online, there's a section at the bottom of your screen where you may submit questions. I'll take those questions and ask management what you're asking. And with that, Tony, I'll let you begin.

Great. Thanks, Paul, and Jon and myself will tag team today. Yes, maybe the best way to kind of talk about where the company is, maybe highlight what's happened over the last year, we obviously had a great year in 2020, up 36%. Half of our growth came from -- that growth came from COVID-related vaccine and therapeutics that we got into. I think we did a really good job in 2020 on building out our systems portfolio. So strategically, getting those 3 deals done was really important for us because we were able to not only add more depth into our systems business, but we were able to expand it into chromatography and downstream filtration. So that was really important [indiscernible] to fluid management part of that through the EMT and NMS deals. The deal we did in 2019, which was the C Tech deal, we had a really good year last year and with very little impact from COVID, to be perfectly honest, where the C Tech business was up 30% year-on-year. That's a really great performance, and that was driven by our ability to hire a -- get them onboard very early in the year [indiscernible] the applications for C Tech beyond the traditional patient measurement into gene therapy and into nucleic acid-type measurement as well. So taking in gene therapy, I think gene therapy continues to be a key driver for us, again, up about 30% year-on-year. If you add it actually in the accounts that are involved that are traditionally gene therapy concept that are traditionally cross into [indiscernible] related programs, our growth would have been north of 50%. I think R&D, we did a good job in 2020 in terms of bringing new products to market. We see R&D, Paul, as a key driver of future growth for Repligen. So being able to get products like TFDF into the market, develop next-generation FlowVPE, new technology for TangenX, get new ligands and resins out around Spike Protein and doing some work around ATF all puts us in a very, very good position as we think about the future. And then the future for us is -- and for our industry right now is highly dependent on ability to build capacity out or stay ahead of the demand for [indiscernible] as you know, we've talked about over the last month or so, there's really strong demand in our industry. And then -- and everybody is trying to grow and expand. So we spent $26 million last year on CapEx programs, including implementing SAP, but we're going to be closer to $55 million to $60 million this year in 2021. So capacity is a big part of what we do. We want to set ourselves up so that we have 3, 4 years' worth of physical capacity space in place, and we're just titrating people in as we move forward. So I think being able to bring the company up into that $360 million plus range, as we've guided to the year this year to be over $500 million, it's another big step-up for us as a company. We've come a long way in the last 7 years, but I think we're very well positioned [indiscernible] our core strengths of technology leadership and smart M&A where we add some additional technology into the portfolio, that's what got us to where we are today. And I think that's what's going to propel us into the future as well. So that's a quick overview of where we're at.

Tony, could you talk to the issue of, obviously, COVID vaccine production takes demand out of the system. Do you think that -- how much do you worry about we produce vaccines and that comes off in 2022?

Yes. There's been a lot of talk about what is the vaccine therapeutics, what does it mean for the bioprocessing industry. It's pretty clear that it really started to kick into gear in probably second half of last year. So we're -- at the end of this quarter, we're probably 2.5 quarters in, in terms of the demand and the demand curve. So we expect -- fully expect that, that demand continues through 2022 and at least through the first half -- or not '22, 2021, at least through the first half of 2022. I think we'll have a better sense of how sustainable it is when we've got a better handle on what are the vaccine manufacturers going to go -- going to do around the variance, will there be a booster shot, is this an annual vaccine that everybody is going to get, is it going to be about annual vaccine. I think those answers will help everybody understand [indiscernible] we're going to see in 2023 some drop-off in demand or do we see some flattening in the new plateau for which bioprocessing can build from. So it's not clear right now exactly how it plays out, but I think there's a high degree of confidence in the next 6 quarters or so, there's going to be pretty strong demand for bioprocessing products.

Okay. The question here was about Sartorius. They had pre-announced about a week ago of 35% growth this year from 25%. A lot of that related to vaccine. What's your read-through on that for Repligen?

Yes. Look, I think everybody in our industry is seeing strong demand for products, and I think the order run rate has been really good. I think from a timing point of view, I think Sartorius probably get their Q4 earnings call earlier in February. I think it was first week or so in February when they reported out. We were towards the end of the month. I think we had maybe a little bit more visibility into the order run rate. I think it's a positive leading indicator for our industry, Paul. It's the best way to answering your question. I think there's strong demand. We don't expect that our $900 million that we talked about for COVID demand is going to drop down. As you know, we've got visibility into the much of year. Some companies have given us orders out to the end of the year. But there's still stuff to be worked on in the second half of the year, so if there's upside to our numbers, it will probably come from COVID as well.

And how COVID was what again in 2020, rather, Tony?

In terms of revenue?

Yes.

Yes. About $45 million, $46 million, if I remember.

Yes, $46 million.

Okay. Got it. And then you've talked a lot about gene therapy recently. Can you size up that business? And your feeling about are things moving into Phase III, some focused players in cell and gene therapy see this as a year of acceleration for approvals? And even a setup for the FDA comment, a couple of years ago, ultimately, we could hope for 20 to 25 a year. But do you think your large customer size of 75, there is the sign that we're in this acceleration phase?

Yes. I think we're -- look, it's a healthy market. Obviously, lots of clinical trials going on. I think, 700-plus up to 1,000 different clinical trials. Obviously, some disappointments last year in terms of drugs not getting approved. But we see that more as sort of growing pains and teething pains, and that approvals are going to happen. Obviously, there's some optimization that has to go on in the industry. It's a young industry, no different than where the monoclonal antibody industry was in the 1990s. You have to figure out the manufacturing processes. You had to get approvals going. And look, I fully expect that you're going to see more approvals. And if you look at this with a 5-, 10-year horizon, 5 years from now, 10 years from now, gene therapy should be a significant part of the approved drug portfolio that's out there, right? So there should be a lot of drugs approved that are gene therapy drugs. I think the big thing for us, though, as a company, Paul, is there's a transition happening in the world of gene therapy. Remember, we play in the plasmid and the viral vector side. So when we talk about viral vectors, we're talking about [indiscernible] and lentivirus. And so there's a shift happening in the industry towards suspension cell on the cell culture side from adherence cells [indiscernible] into Repligen's portfolio. If you think about monoclonal antibodies, that suspension cell technologies that we have, that work very well upstream are going to become even more important in the gene therapy space, so technologies like ATF and TFDF. And we've already proven that with those companies that are working with our technologies that they really do have a significant impact on yield and performance. [ So to me ] we're going to focus on the accounts. We're going to focus on improving efficiency for our customers, getting them better yield, putting the best technology in their hands. The approval piece, I think, the market will sort itself to out over time.

Where do you think the research community is in this suspension cell versus adhesion cell growth? Is it 10% trying to do suspension format? Or what's your guess?

Everybody is -- so it's not -- it's probably not even at the research level right now. It's happening at the process development and manufacturing level. I think every -- most companies are looking towards moving to suspension cell for viral vector manufacturing.

Okay. And then the ligand business, I know you've got the GE contract expiring towards the end of this year, but it just seems like it's such a robust environment that somebody will want it to uptake Protein A, no? What's your thought there?

Yes. Look, the -- obviously, if we were having this conversation that was 2014, 2015, it would be a much bigger percent of Repligen's revenue. So I think the good news is we've diversified so much and grown so much over the last 7 years that the impact of GE, Cytiva on us is no longer what it once was, right? But that said, there is no doubt that we want to continue to be a supplier to Cytiva and Millipore and Purolite and other players. That's part of our strategy. I think the piece that has changed over the last few years for us is we realized, back in that 2016 to 2018 time frame, that we were more of a CDMO on Protein A ligands than an actual originator or inventor of technology, right? We weren't -- while we might be the technology leader in ATF and technology leader in OPUS, we weren't really the technology leader with our ligands, right? We were more contract manufacturing for the Millipores of the world and Cytivas of the world. So the work we've done with Navigo and the work we've done eventually with Purolite is getting more of Repligen ligands into the market. That gives us a little bit more balance in the portfolio. I think our expectations with Cytiva is that we'll extend the agreement we have with them that expires at the end of the year. We'll figure out what volume percent they want to commit to, but we fully expect that our ligands business will continue to be an important part of the company. And once we get through what, I would say, is a -- when we get into 2022, that probably will be the kind of the base from which we will grow from with respect to Cytiva. But we're filling -- Millipore, we're definitely filling in some of those gaps with the work we're doing with Purolite, and we've got other ligands that are under development. So again, I think it's a solid business for us. I think it will be a business that will grow mid- to high single digit for us going forward from a 2022 base. And I think we have a good strategy in place, a much better strategy now than we had 5, 6 years ago.

Right. And then a question here was does the Navigo partnership have the potential to expand into cell and gene therapy for you, Tony?

Yes. I mean, it's -- there's clearly a need in the cell and gene therapy space for affinity ligands, and there are some players out there like Thermo and Cytiva that have products. So it would be a natural extension for us to look into that market and see what we could do.

Right. And the Navigo partnership, a couple of years old, I believe, now. What's their -- they and Purolite, I'm sure it takes a while to get spected into some programs, but how are their development efforts going?

Yes. So they're very different relationships. So the Navigo relationship is more of a research relationship, so we're developing technology. The relationship with Purolite is around the Protein A ligands and getting those onto a very high-performing agarose bead in their Jetted A50 material. So think about Navigo as an extension of Repligen's R&D efforts, where we're working very closely together, highly collaborative, great group of folks in Halle. And we work very closely with them, and we have multi-ligand program that we're developing with them over time. Purolite piece is definitely around go-to-market strategy, right, especially -- and what we've focused on with Purolite until now has really been on the Protein A resins and bringing next-generation ligands into market on their technology. Now that said, we've also worked with Purolite where they've provided us with their base speed, and we brought the resin to market, but that's being sold directly by Repligen, right? So we feel there's a happy medium here where some of the big markets, like the Protein A resin market where Purolite has a dedicated sales force, that makes a ton of sense. We think some of the custom resins like the Spike Resin and some of the other customers we're working is something that our sales team can take care of because it's a smaller -- it's not a distraction to what our team does, and it's into a very similar -- into the same accounts we're already selling into. So it's a good partnership on both sides. We're really happy with how they both played out.

Tony, your portfolio has always been all about increasing productivity, or I could say, tighter. What portion of your products do you think really enable a greater level of productivity? And then the broader question is, is the industry making such progress on titer that less capacity would be needed in the years ahead?

Yes. It's a great question, and you almost have to use a little bit of history to kind of see the progress the industry has made. So if you were back in 2000, you would -- titers and bioreactors would have been a gram per liter, and that was coming from 200 mgs per ml to 1 gram per liter between in the 1990s. So it's like a 4, 5x increase in expression levels. And now you're -- it's unusual to have processes that are anywhere less than 3 to 5 grams per liter in terms of expression, and some of them are well over -- or up at 10 or over 10 grams per liter. I think there will always be a natural progression of increased titer over time. I'm not so sure that, that's the driving force of the industry versus, say, maybe 10, 15 years ago where it clearly was, I think right now, the industry is pivoting more towards process intensification. And what I think it will do is, as it -- as we see a lot more process intensification happening, there's going to be a natural linking of unit operations, so that -- or even elimination of unit operations, so you start to move into that on semi-continuous and continuous manufacturing. So the process intensification concept is simply how do I get more out of my unit operation than I was getting in the past. So while we might focus on titer, I think people are focusing now on how do you get the maximum expression level and yield out of a bioreactor using technology like ATF, how do you maximize harvest clarification, so you don't lose 4%, 5% of your product in the elimination process, how do you maximize what's going on in chromatography so that you minimize losses. So they are the questions that people are trying to answer. I think they have a lot -- the industry has a lot more experience in the map world in doing that. I think the gene therapy world is just getting started on what I would call the process intensification strain or train. So I think that's where the industry is right now, and it's going to migrate towards semi-continuous and continuous manufacturing over the next 5-plus years.

A question here. Tony, is -- are you in an M&A pause mode to integrate? Or where are you with your program?

Probably the same place as we were last year when you asked the same question. And I would say we don't really comment on -- I would say we're always talking to companies, Paul, right? And it's -- you just can't take a pause because opportunities arise and come up. But in general, we're always on the lookout for great technology that fits with the strategy that we might have in each of our businesses. Yes.

And are you accelerating R&D?

I would say we're -- because our revenue growth has really jumped up, right, it's probably hard to say on a percent basis we're accelerating R&D., but I think we're investing a lot more dollars into R&D. And because we're doing that, I expect to see multiple product launches per year coming from us.

Okay. Got it. And then can you talk to the recent ARTeSYN acquisition and how that fits into the portfolio and the sales force, how it's kind of ready to go with it is my impression?

Yes. So there's a few things about the ARTeSYN deal. The first one was just understanding what Repligen had in terms of the systems portfolio prior to ARTeSYN. So prior to the ARTeSYN deal, we had really a systems portfolio that was very focused on hollow fiber technology. And while we were selling a lot of flat sheet cassettes into the market through our TangenX product line, we didn't really have a systems product offering to complement that. So we knew we had a gap there. We also know that we sell lots of OPUS columns, and while customers have their own systems that they operate these columns on, there's a channel there and a customer touch point that we weren't really taking advantage of. So our strategy was really around how do we broaden our systems portfolio, so we have downstream presence in chromatography and filtration. And then as we thought about it, we know that the industry has pivoted towards single-use technology. And so the flow path piece becomes a really important part of our system strategy. So we have a product line called ProConnex. That is really our hollow fiber flow -- our flow path assembly, which is how the liquid flows through essentially plastic tubing with sensors. We were able to pick up EMT and the assembly part from NMS, but those are what I would call a consumable stream with the systems that we sell. So where everybody looks at a chromatography skid and they'll say, "Okay. Well, which chromatography resin are you selling with that skid?" And the answer for Repligen typically would be, we're not, right? We might sell OPUS columns, but we're not selling that per se. But when you start to look at the flow path, that's essentially a consumable. If you were to buy a chromatography resin, Paul, like an exchanger and you bought 100 liters and you put it in a column, that 100 liters would cost you $300,000, somewhere between $250,000 and $300,000. You use that column maybe 100 cycles to 200 cycles depending on the process and where you were in the flow path [indiscernible] was Phase III or commercial. But if you're in commercial, you're running that column a couple of hundred times before you change it out. When you use fluid management flow path like single-use plastic assemblies, that's $10,000 plus, sometimes up to $25,000, depending on how complex it is that you top out every time you do a run. So you think about your $300,000 of chromatography resin, we're $10,000 to $25,000 of a fluid flow path every single time we do production run. So that adds a really nice consumable stream into the equation for Repligen, and that's probably a big part of our thinking around why we branched out, why we added more products into our systems portfolio. And that's why we did the 3 deals last year.

Got it. And C Technology seems to be one of those product lines that you've increased your sales force, really getting the critical mass. Where are you with C Technologies right now, Tony?

Yes. This was one where, I think, I remember in 2016 and 2017, you would ask me, :Well where are you going to branch into, Tony? Are you going to go into any other areas besides filtration and chromatography?" And I would say, "Well, I like analytics, and analytics being sort of near and dear to my heart over my whole career, so I was always on the lookout for a technology that I thought was really differentiated." That came along with C Tech. Their Solo and FlowVPE products are highly differentiated in the market. The SoloVPE is considered the gold standard. So I'm really proud of what that team has been able to accomplish in a very short period of time, and they have executed and delivered on everything they said they were going to do. And in a year like last year where a lot of our product lines that weren't going into COVID, you're challenged because you can't get into customers. The fact that we grew the business 30% last year is a reflection, in my mind, on [indiscernible] technology and how important it is at a customer level and how differentiated it is in the marketplace. So we expect big things from C Tech over the coming years. It's been a great addition to the Repligen family for us.

Is process analytics still a fragmented world, where a lot of smaller vendor is out there?

Yes. I think for the most part, it is. Every -- all the big players have core product lines. If you look at Thermo, they have a process analytics business. That was something that I personally set up from scratch when I was there, but that's a business that's -- its core foundation is built around qPCR and DNA sequencing. And you look at other players in the industry, they all have their niche where they're focused on. So Thermo is focused on residual DNA, microplasma, that type of product and process contaminant detection and quantitation. We are focused on, honestly, the -- monitoring the target drug, whether it's a protein, [ whether it's about full ] antibody or it's a viral vector or it's mRNA, whatever it is, right? That's kind of our core competency in the space. There are lots of small companies out there with early technology that have a play in this industry. I think the key over the next 5 years or so will be once they're going to get adopted as a standard, where does Repligen want to kind of play in that. But there is definitely more fragmented industry than, say, some other parts of bioprocessing.

Got it. A question as well from the group, and this is for Jon. Further progress on margins, is this going to be driven by more mix or volume?

Yes. I think the upside potential that we have over time to grow our margins is going to be volume driven, all more than mix per se. I mean, the challenge we have this year were -- for 2021, we're absorbing the systems businesses that we acquired and [indiscernible] businesses. Their margins are a little bit lower, so we're absorbing that this year. And we said that we'll hold the line on adjusted gross margin and operating margin for 2021. I think, over time, as we continue to grow and build volume, we'll be able to absorb that. We'll be able to improve margins in those businesses. And we'll be able to continue to expand operating leverage, particularly over the SG&A and R&D lines. So we expect we'll be able to continue to grow those over time.

Right. What's the operating margin is in the -- not that you have one, but the 5-year goal?

Yes. We haven't really put one out there, but we're -- we said this year, we'd be between 26% and 27% adjusted, right, which is pretty consistent with where we were last year. We should expect to be able to grow that a little bit each year going forward after 2021, we believe. So we'll be -- I don't want to put a number out there, but we should be able to gain 20, 30, 40 basis points a year on that over time.

And Tony, you're about #5 in the industry now. What do you think about in terms of a Repligen size in a few years?

Yes. I mean, it's -- we've come a long way in the last 5 to 7 years. There's a big gap between 5 and 4 in terms of revenue, so we've got a bit of a lengthy runway to catch up with the other guys. But we like what we have. We think we're on track to hit that $1 billion in the next 4, 5 years. And I think it's -- right now, this industry is about having technology and having capacity. If you can solve for -- if you have great technology and you have capacity, I think it's a good place to be right now.

Yes. Is the Merck Millipore the # 4 player?

I would -- no, I would say it's probably Sartorius, but there's not a huge difference between -- I think Sartorius, MilliporeSigma, Thermo are all fairly close to each other in terms of size. And then obviously, Cytiva, Paul, combination is much bigger than everybody else.

Right. Could you -- I guess, the last question I have, Tony, is the nature of in-house relationships like Thermo manufacturers, does Thermo buy from Thermo, the supporting equipment? Is Sartorius is a supplier of European biologic companies? Is that -- does that happen in the industry?

You mean like are we buying products from Thermo and they're buying from us and Sartorius buying from us and we're buying Sartorius stuff, is that the question?

Yes.

Yes. Look, I think it's -- we all know each other. We all compete and we all buy products from each other, so it's -- I think it's a big pond, right? It's more than a pond. It's a pretty big ocean. I think we can all fish without people having to be crazy on the competition side. So yes, while everybody has their strengths, I think there's still so much going on, Paul, in the world of bioprocessing that we're all just trying to do the right thing and get products out the door to customers, especially now given what's going on with COVID. So I think there's actually been a really great rallying cry within bioprocessing where the collaborative nature of Cytiva and Thermo and Sartorius and Millipore and us, we're all trying to do the right thing, less of the old competition piece and more of the right thing for the industry, for society and get as much of product delivered to the manufacturers of these vaccines and therapeutics. So it's actually been a pretty interesting year for all. I think we're all on the same train.

Last question, Tony, and that is we asked all of our participants, and that is what is your view on 2022. Are we back to normal in business and industry? What's your thought on next year?

I'm smiling. If we were doing this on the 17th of March, I would say you're trying to give me my St. Patrick's Day question, but we're off to [indiscernible]. So no, I think it's early days. We're focused on 2021 right now. We've got a lot to do. We think -- as I said at the outset, we think COVID demand will definitely go through the first half of 2022. We'll know a little bit more. I think it will be easier to answer that question in the, I would say, August, November time frame, rather than in the March time frame. So right now, it's all about executing in the presence.

Yes. Great. Good. With that, we are at our time, but I appreciate being here today. I know you're doing meetings as well.

No problem, Paul. Always a pleasure. Thank you.

Okay. Thank you.