Repligen Corporation (RGEN) Earnings Call Transcript & Summary

Yes. I think the key to the commercial team, believe it or not, is to be flexible. I think if you try and put one structure around it, you can make some bad decisions. And I think the best thing we've done so far is we have a bifurcated sales force with the -- what we call the bioprocess account managers and the bioprocess sales specialists. The sales specialists are specialists in filtration or specialists in chromatography. And now we're adding in specialists in systems, upstream systems, like the ARTeSYN -- and I wouldn't call it upstream, but filtration systems and chromatography systems. So having those specialists really, really helps our regular sales force, a, learn a lot more about the technology, the types of questions customers are interested in. But at the same time, we can bring in someone with deep knowledge that can go 6 to 12 rounds with some of our best customers in terms of how they think about utilizing these technologies, what's important, how you scale. So that structure has worked for us. The piece we've added in more recently is as we have executed on some of these deals, like EMT and NMS and the component part of ARTeSYN, we've created another small but important specialist sales team that's going to focus on selling those, what we would call the kind of the component flow path products into our customers. So I think at the end of the day, you're going to have a large umbrella of BAMs, if you want to call them, the general sales team, with dedicated specialists covering different parts of the portfolio. And we went originally, John, global, with our BSS strategy, which was the right thing to do 3 years ago when we had just finished the Spectrum deal. But what we're doing now is those global BSS managers and leaders are now adding in regional leaders underneath them. And so when you take something like ATF and you have a global BSS that's responsible for all the ins and outs of the ATF technology or the business, having a European BSS and a North America BSS and an Asia BSS really gives us more depth within the regions. And I think that's what we need to do to continue to scale not only the business, but the company.

Great. Okay. Let's go to the market now. My sense is the environment is unprecedented, but I'd ask you, if you think back over the last 3 decades that you've been in this industry, have you ever seen anything like this before? Talk about other sort of cyclical peaks and troughs and what that tells you about what we're experiencing now.

I suppose 5 years from now, I can tell you whether we were dealing with a short or a long-term peak, and there was no trough or a trough came, but yes, unprecedented. I don't think we -- I've ever witnessed anything like what we're going through with respect to the COVID vaccine and therapeutic demand. We believe -- I believe that this is definitely going to last multiple years. It looks increasingly clear that the companies are definitely moving towards the booster shots and potentially the annual vaccination. So I think all of that put together means it's here to stay, and we'll see what happens in 2022, 2023 and 2024. But we don't think it's a 2021 phenomenon at all. And we definitely think there will be a strong 2022, and we'll see what happens based on booster shots, et cetera when we get for 2023 and 2024. That said, the other events that I've seen, and I would say, over the last 13 years, 2 events. One is the post-financial crisis in 2009 where bioprocessing was down, probably, I don't know, probably 10%, 15%, where all the inventory was burned off over the course of that year. But then it bounced back, I don't know, I think it was like a 30%-plus type growth year in 2010. So while you had a dip for a year, it bounced back really, really quickly. And the same thing happened in 2017, if you remember. We had -- most of our peers had a flat year. I think we were up 9%. And that lasted really all of 2017 through the first half of 2018, and it was really the second half of 2018 where we -- where everybody started to see a surge again in demand. Again, that was an inventory management-type event, but the industry was flat, not down, and it kind of lasted 12 to 18 months. And then obviously, since mid-2018, the bioprocessing industry has been pretty much on a tear and obviously, last year was -- a further acceleration happened in the marketplace. So yes, they are the 2 events that kind of stick out in my mind over the last, say, 15 years. And this one is definitely different and unusual, but I think it's also -- I think it's going to be sustaining too.

That's a good segue. You mentioned inventory levels in the channel a couple of times. You've had really, really strong order growth the last couple of quarters, I think, in particular. Are you able to monitor inventory channel levels? And do you have any concerns that they're getting elevated and might result in a dip once things cool off a bit?

Yes. It's a great question, John. And I think the challenge is we don't know. I think we absolutely suspect and be extremely surprised if inventory levels weren't being built up. I mean if we look at just our own situation where we are obviously growing our business well north of 60%, 70% year-on-year, you -- what we're doing with our suppliers is we're increasing our inventory levels because we don't want to be caught in a situation where demand continues to surge and we're not able to get the components that we need to build our products. So if we're doing that, then suffice it to say, I think the industry is doing that, whether it's other bioprocessing players doing what we're doing, which is absolutely happening to the biotech. Biopharm CDMO folks doing that as well. So there's definitely an increased number of months of inventory being held by customers, but they do not talk about, oh, we're trying to get to 6 months inventory or 5 months inventory. There's definitely orders being placed much further out. I think if you had gone back and asked me this question in 2019, I would say customers place orders maybe 1 quarter out, maybe 1.5 quarter out. Now we're seeing customers placing orders out 2 quarters, 3 quarters out. It's not like all orders are being placed that far out, but there's definitely orders. As we -- when we gave our updated guidance in the end of April, beginning of May, we have orders that are sitting out in the beginning of Q1. So that kind of gives you the sense that people are a little worried. That they don't want to get caught in not being able to produce their drug or manufacture some subcomponent in a production stream. So I think people are being cautious. I'm not so sure that if COVID went away tomorrow morning that everybody would say, hey, I'm sitting on 6 months of inventory, I'm going to go back to 3. I've a feeling that people are burnt once where you've been keeping it at inventory levels that were very manageable, kind of just in time. It might be that people wait a year or 2 before they get comfortable enough to say, hey, look at my 6 months, I'm going to go down to 4 months. I think the levels of inventory people are holding are going to probably hold at this level for a while.

Got it. Okay. Interesting. Do you think that kind of industry growth on the other side of the pandemic goes back to that sort of -- I think in the past, you've talked about sort of in the 10% range. Do you think that's where we get back to? Or do you think we have a new normal at perhaps a higher level?

Yes, that's -- I think that one is hard to tell. But look, if you look at the bioprocessing industry between 2010 and 2020, I would say that the growth rates ranged from -- beyond that 1 year in 2017, probably 8% to 14%, 8% to 15%. Some years, it was up at the high end, 12% to 15%. The other years, it was down around 8%. But in general, that was the range. I just think that there's no reason why -- there's absolutely no reason that the industry would fall back to a lower range than 8% to 12% or 8% to 15%, somewhere in that range. And I think there's probably an opportunity once whatever the post-COVID settling of the market looks like, right? In other words, let's say, in 2023, there is a -- there are half a dozen players making COVID vaccines. That it's an annual event, that the demand on an annual basis is 50% or 30% of the demand -- or not 30% but 70% of the demand that existed in 2021. Then you kind of hit a new base and you build from there. And there's no reason that our industry won't grow at or above the rates that we've seen historically. I think there's more modalities out there. Cell and gene therapy just didn't exist back in 2010 or it was -- or it did, but it was really, really small number of companies working on it. You're going to add -- I think mRNA has been a big winner in the whole COVID vaccine world. And so I think you'll see more work being done in that arena. I think you're going to see exosomes and other modalities coming through. So I think it's -- and if cell and gene therapy from an approval point of view goes up, then I think there's a lot of momentum that comes into the market and keeps our market growing north of that 10% range for sure.

Okay. On your Q1 call, I believe you guys talked about COVID work being about 25% of revenue, both in Q1, but also for the full year. In your view, is it more likely to be a higher or lower percentage of that if we think about '22?

'22. Yes. I think in terms of where we are this year, yes, right on on the 25%. I think we're probably forecasting or guiding a little higher for the year. I think it's closer probably to -- in the 25% to 27% range. Orders are at the -- about 1/3 of our orders were COVID related. So you can see where it could kind of fall, right? It could be anywhere between 25% and 30% by the time you get to the end of the year depending on demand. I think the big question is next year. Is it same demand in 2022 as it was in 2021? We have -- the customers we're working with, we have a number of customers who have come back and said, here's what our demand forecast will look like in 2022. Others are still working through it. I'd say we're a few months away from having a full picture. I don't expect to see any significant drop-off in COVID in 2022, right? And so I think we're operating off the mechanism that it's at and potentially above. But it's going to depend a little bit on what companies forecast in terms of what they need. They'll then -- because next year is going to depend a lot more on what happens with booster shots and whether there's an annual vaccine. Because if you do a booster shot and it starts, let's say, late this year, early next year, that's going to add demand. If there's one that has to be done, like an annual vaccine the following fall, then you could see how that could add to the demand curve. And then on top of that, we're working with a number of companies who are in that mid to late stage with everything from protein mRNA, viral vector-based vaccines that have yet to go through the final approval. So they're a bit of the wildcard because if they get approved, they're going to get some share of the market. And if we're in those potential vaccines, then that's an upside for Repligen.

Got it. Okay.

[ There's no ] visibility yet to -- we have the potential, but it's all based on going through the approval process. And until something is approved, it's really hard to bake it in.

Got it. Okay. Tony, we've got 3 minutes. I've got 2 more questions. I'll just throw them both out so you can sort of time your answers accordingly. One is M&A. Should we think about '21 as being sort of a typical year for Repligen, realizing you had a pretty busy '20? And then the other, can you just give us an update on innovation? If there were a couple of products that you're most excited about as you think about the next 12 months, what should we be focused on?

Yes. M&A is I don't think any different this year than it's been in prior years. We've always had a target list of companies that we like. We're always talking to companies. So expect every 12 to 18 months, we're doing medium-sized deals. There could be some tuck-ins just like last year that we did. But that's kind of the cadence. I don't think it's any different this year than other years. From an innovation point of view, I do think that we continue to see really good progress with TFDF technology. We're really bullish around our FlowVPX product that we launched earlier in Q1. We think that has a ton of potential. It's something that the market needs. We think there's a lot of potential around our systems business, especially now that we have a whole portfolio of systems covering upstream and downstream: flat sheet cassettes, hollow fibers, chromatography and the associated consumables that come with those, John, that we talked about earlier. We're excited about that. So we think that the ability to -- and we have a lot of the innovation already done. We just have to do some integration and prioritize. But yes, there's a lot of important products still in R&D that will hit the market that I think will keep pushing Repligen along as a technology innovator.

Great. One more -- I just thought of one more and we got a minute left. Any supply chain issues? How is the operational side holding up given all the strain of the high growth?

Yes. I would say, overall, pretty well. I mean we're -- there isn't a month that goes by where we don't have something that crops up that you would never expect would be a supply chain problem. But our team has done a great job of almost -- like every one of those events has come up with a solution. But it's the -- it's not the critical components that kind of get you. It's some of the other components that you look at and you say, well, why would this like be an issue, right? And all of a sudden, it is, and you have to go solve it. So being able to build that procurement team up from some of the best companies in our industry has really paid off for us because we have the reach into different organizations. We know who the players are. So like everybody else, we're -- the whole bioprocessing industry is working with supply chain challenges. It's not going to change for the next 6 to 12 months. But I think once everybody brings their capacity online, it's going to be a slightly different world to better lead times, less issues on the supply chain. And I think, overall, customers are a little happier that the lead times are a lot shorter than what they've been.

Excellent. All right. Let's cut it off there. We're right at time. Thanks very much, Tony, for your time.

Yes. Great, John.

Congrats on the success, and thanks to everyone for listening.

Yes.