Repligen Corporation (RGEN) Earnings Call Transcript & Summary

Okay. Welcome back, everyone. This is Day 3 of the Stifel Healthcare Conference, and we are on the life sciences and diagnostics track. And with us, to kick things off this morning, is Repligen. We have CEO, Tony Hunt; and CFO, Jon Snodgres, with us. Guys, thanks a bunch for joining us today and spending some time talking.

Great. Good to be here, Dan.

Yes. So Tony, we've taken a bit of a step backwards since June when we got together, and it felt like the virtual stuff was winding down, but we're -- it's okay. We're getting there. Hopefully, we get there soon anyway. And during that time, the business continues to perform well. 2021 is going to be another good year for you guys. So can you -- along those lines, can you just maybe start with any intro comments that you want to make. But for me, I think an interesting way to just sort of frame it would be what are you most surprised with in 2021 so far. I think some of those things are pretty obvious, but maybe there are some other less obvious points that are worth touching on.

Yes. It may be surprise you, but the obvious ones are the ones that have surprised us, too. So yes, look, when you look at -- I think the big thing for us beyond what's going on in COVID is the base business growth. So 37% organic growth year-to-date has been really, really impressive for us. But if I look at the year and kind of think back to where we were in sort of the February time frame and where we are right now, I think COVID clearly -- it was an unknown at the beginning of the year. We kind of knew what we knew, but we've gone from $90 million to $100 million guidance for the year up to $175 million to $180 million. So clearly, the COVID side of the equation has outperformed what we knew 8, 9 months ago. I think kind of the balance to that is really the further acceleration in our base business, the non-COVID part of our business. So that's historically been growing kind of in that 20%, 25% range. But this year, it's definitely outperformed our expectations. And within that, I would say filtration is not a surprise in the sense that the filtration business is doing really well. But being at over 25% or so is really impressive. And it's across the board, everything from ATF to our flat sheet cassettes to our hollow fibers. But probably the one part of the business that we don't talk a whole lot about, but has done really, really well is our filtration systems portfolio. So that's like legacy spectrum to terms and now rolling in on top of that is the ARTeSYN system. So that gives us what I would call the capital equipment now to go with the consumables stream that we've always had. So that's been really an upside surprise for us. I think the other 2 would be the proteins business. I don't think -- even last year, we weren't expecting that the proteins business would perform at the level it did. And again, this year is really the same performance and protein very strong demand on the ligand side, not just from Cytiva, but from all the players. Growth factors continues to do well. But again, growing well above our expectations versus where we were at the beginning of the year. And then the final one is the deal we did in 2019, I think. We made a big investment into C Technologies, that's paying off. And I'm incredibly bullish on that business and where it's going. And it just continues to thrive in the marketplace with the technologies we have, the new products that are coming through. So that's going to be a great kind of leg in the stool for us as we move forward. So that's kind of a quick summary of where we were, where I see performance that was above and beyond what we were expecting but sets us up well for -- honestly, for 2022, especially with a strong base business. COVID seems to have kind of more steady state in terms of revenue on a quarterly basis and a little bit more predictable versus what we've maybe seen in the past. I think that just sets us up for a nice 2022.

Yes. Okay. That's a great way to set the baseline here. Maybe -- we'll get to the COVID stuff in a second, but maybe to your point on the non-COVID side and the strength there, in particular filtration, you have to make some assumptions. And Jon, you can -- I won't walk you through too much of a math exercise. But if I make some assumptions that I feel like it should be ballpark correct, I have your non-COVID filtration business up 55%, 60% this year, which is -- it's a pretty heady number. So it's a comp that's tough in 2022. But it's coming from a pretty meaningful number last year as well. So how would you sort of have us think about the run rate there? And I don't want to start putting words in your mouth, but I mean, it seems easy to envision for me that, that's a steady state 30-plus percent growing business, just given the momentum that you have and some of the things that we've talked about in terms of the critical mass that the portfolio has. Would you -- where would you tell me to run with those ideas or back off of those ideas, I guess?

Yes. No. So I think the first one, in terms of overall growth, you're right. It's just been a stellar growth year for the filtration business and for the non-COVID part of it. I think if you start to look at the components of the filtration business, as I said a few minutes ago, the -- it's across the board, right? I mean ATF is doing incredibly well and that's stemming from the fact that we built up a basically a deep account list that are scaling and implementing the technology. And then some of the big players who had kind of stayed on the fences for -- or stayed on the sidelines for a while, have started to jump in and are now using ATF technology. So that's incredibly helpful for us as we think about the future. Our flat sheet cassette business, I would say, big benefit, flat sheet cassettes and hollow fiber coming from COVID. But on the flat sheet cassette side, we've been able to maintain our lead times probably better than most, and we've been able to take some share in the marketplace where lead times have been a challenge. So that's like a nice pickup for us. I think the unknown in 2021, and I'm sure you'll smile as you hear me say this then, why I would not necessarily assume 30% plus growth in 2022 is -- When we look at our supply chain side, we know that we're building -- or trying to get as much product as we can so that we don't run short. And I think there's a general trend in the industry that everybody is trying to secure your supply chain. So if we're trying to secure our supply chain, then our customers are definitely doing that as well. And while we have no idea if people are buying product and holding 3 months, 4 months, 5 months, 6 months of safety stock but they won't tell you that. I would assume that there's definitely some buildup of safety stock into the overall non-COVID growth number. And so at some stage, that kind of reaches a steady state, right? It's not like it's people are going to ramp up and keep ramping. So you would think that by the end of this year, you're at that point and therefore, next year, you're looking at more of a normal growth here. So I think north of 20%? Absolutely. 30% plus? I think it's a little too soon to call it. I would say we'll take a look at it for sure when we get to February. But I think from a modeling point of view, north of 20% is something that I think we're confident about.

Okay. Okay. Maybe just continuing on line of looking at the different parts of the portfolio there. Are there products that you feel are ramping in a way that will make them a bigger part of the conversation next year 2023? I mean I say that with honestly, TFDF, at least a little bit in mind because that, to me, has always kind of seemed like the type of product that had a pretty interesting future. If you started taking some share and customers started to think about that as maybe becoming sort of a standard for them. So can you just maybe catch us up on how much of that is being -- how much of that product is going towards show-related mAb work? You've talked about the viral vectors piece of that business. And is that a product that you think can -- you were on track to double in 2021. Is it fair to think of that trajectory as still being in place for 2022?

Yes.

I think small base, obviously, but doubling none the less.

We definitely doubled the business in 2020, and I think we'll be close to doubling the business in 2021. I would say that one challenge we did have with TFDF was, honestly, the labs being shut down for the most part last year. So that's kind of slowed a lot of the valuations, but that's up as we've -- yes, demos. And so kind of last year was really -- revenue-wise, was driven by what the work was done in the prior year. So that's been -- that slowed us down a tad. But I would say we're happy with where that business is going. There's definitely a lot more interest based on the work we did with Oxford on the use of TFDF in lentivirus. So I think that leg on the stool has been kind of firmly established that you can use the technology in lentivirus, harvest tariffication. We're also beginning -- we have made progress in AAV as well. So to your question, I think there's definitely a better split of show versus viral on the exact split. But I would say it's probably 30% to 40% is probably coming out of the viral vector space, and that's a guess. And probably the majority still is show. But customers like the technology. We just need to continue to get the evaluations going and continue to drive adoption. I think the other product that kind of falls into the same kind of vein of early-in-its-career-but-making-good-inroads is the flow technology from C Tech. So I think FlowVPX, it solves so many of the challenges that customers felt were out there when you looked at an in-line detection technology. And so that's ramping really quickly. And I think we're very bullish about the VPE technology in general and Flow specifically. So I think those 2 products continue to drive a lot of our sort of NPI revenues, which is new products. clearly, the other products that are emerging. I see what we've done with the ATF controller technology is more of an upgrade to existing controllers. So you're -- there's a little bit of cannibalization because you're removing all controller revenue and replacing it with new controller revenue. So it's hard to put a growth number on that, but that's addressing a lot of the easy use features that the customers really wanted addressed with the older technology. And then products like the new sort of high pH ligand that we commercialized through Navigo and now has been commercialized by Purolite as a resin, again, we expect that that's going to ramp over the next couple of years, just simply because people need Protein A resins that work for antibodies that are prone to aggregation. And so there's no competition out there for a product like that. And so it's a matter of getting evaluations going and then getting into some Phase II, Phase III trial. The Phase I trials are not going to move the needle revenue wise. But if we get into a few -- if you get into 1 Phase III or 2 Phase IIIs then that's going to be meaningful for everyone. So there are some of the products and where we're going. Obviously, there's a bunch of other products we haven't talked about, but expect that we continue to launch, I don't know, 3 to 5 products every year.

Yes. Okay. That's great. I want to hit on proteins, obviously in a minute, but if I just stick with filtration, chromatography and then process analytics. On the filtration side, I mean, that's obviously a big part of what's going on in gene and cell therapy for you guys or gene therapy anyways. So underneath the 30% to 40% growth, I believe, for cell and gene, gene therapy that you're seeing, how much of that is coming from filtration and how much -- what would be the growth rate for chromatography inside that market? I mean it seems like it should be a markedly different growth rate. But is there a way you can kind of help us dial that in when measure the magnitude [indiscernible]?

I can give you the split. So 75% of the revenue in cell and gene therapy is coming from filtration. And let's say, 25% is coming from chrom. There's probably 4% or 5% that you could break away from both of those to go into the other product lines. But that's probably the right split. Remember that when you're talking about chrom, you're talking about OPUS prepacked comps. And until we have the new products from Avitide, we're really not going to have an impact on chrom resins in that space. Now that said, the nice thing about doing the ARTeSYN deal is we will be adding and are adding a portfolio of chromatography skids that will go into both the CHO side and the viral vector side of bioprocessing. So we're adding to the portfolio. And I would say the last 12 months, honestly -- because we only closed on ARTeSYN in December of last year. If you think about the last 12 months, we've added in a world-class systems portfolio that gives us filtration, it gives us chromatography, it gives us virus filtration, it gives us media prep. So that's really just a great portfolio of products. And what we've had to do over the last year is really figure out what the -- what's the best way to bring a portfolio like that to market? And where -- I would say ARTeSYN up until 2020 -- let's say, 2022, because we've gone through a transition period this year, has really been a custom shop, right? So if you want a system, we designed that system to what you want as opposed to we configure a system and you add in the bells and whistles that you want at the end of the day. But there's a main kind of standard format that we work off. So that's directionally where we're going. We're going to be -- we're pretty much there on the chrom side. We'll have the filtration portfolio done first half of next year. And that just gives us a lot more flexibility. It allows us to move faster, process to have quicker lead times, faster lead times for products. So in general, I would say that the system side really becomes an important driver overall in the chrom part of the portfolio.

Jon, is there anything about the way that the OPUS business is evolving that impacts gross margins next year or going forward?

Yes, we've seen a nice impact from the shift of customer revenue coming from columns versus resins, as we've talked about. I'd say if you were to ask us 2, 3 or 4 years ago, we'd say that mix was more like 50-50. It moved up to 60-40 and now it's progressing even up towards that 70-30 kind of mix area. So we get single-digit pass-through revenue -- or excuse me, margins on the resin side, but we make good margins on the columns. And so that mix shift has helped us. I think we'll continue to see a little bit of a transition in that direction on the benefit side as we go forward as we've opened up our grid operations, right? And that gives us the opportunity in Europe to do some of the same things that we've done here in the U.S., working with our customer base. So I'd say a continued shift to the better, but it's going to be at a smaller pace than it's been over the last, say, 2 years, but definitely should be moving towards a higher mix of columns as we go forward.

Okay. Okay. Just quickly on Flow and that business. Tony, is there anyone that's sort of not looking to improve their capabilities on the process analytics side? And I don't mean to be flippant with that comment, but it really does seem like that's a focus for pretty much all of the companies in bioproduction. So the essence of the question really is like where is the selling harder than it is easier with that business right now? If you just kind of look at the overall picture and say it feels like it's a pretty invogue thing to focus on.

It's definitely an invogue thing to focus on. And there's no solution for drug concentration measurement. And I'm using the word drug as opposed to protein concentration because you can measure not only monoclonal antibodies, recombinant proteins, but you can also measure oligonucleotide mRNA. So it's a very versatile technology. And people want in line monitoring. I think the progress we're seeing, especially in the second half of this year as the Flow technology is really just the new VPX technology has rolled out that there's a real pent-up demand for this technology. So I expect it's going to be a really important part of that growth story. I think the other part on the -- and if you look at the VPE technology, which means Solo and Flow, and Solo being your off-line measurement, I think the big shift that's going on at C Tech is the realization and the focus on customers that are outside the core monoclonal antibody market. So that's really where C Tech had made all its sort of -- if you look at the total installed base, 95% of the installed base was in the mAb world. And now with -- under a Repligen umbrella, we have the whole gene therapy initiative, we have some decent inroads into COVID, all of a sudden, new markets are opening up new application areas are opening up. And we've added in a 10%, 12% sales force that can just expand even within the core base that they've -- that C Tech has always had. So yes, we're really happy with the way that deal is gone, and I think the future is really bright. I'm fully aligned with your thoughts.

Yes, for sure. Maybe on the protein side, the focus for a lot of people for a long time was the Danaher, Cytiva, GE business and where that was going and what that meant for you in the out years. You've done a bunch of things to kind of help that cause. Do you feel like the partnerships and the new products and the things that you're doing now or have done? How much of what you might see as that business relationship evolves can be offset by some of the newer initiatives that you have, Purolite, Navigo contract negotiations with Cytiva, et cetera?

Yes. I mean you know really, over the last 5 years, that's been clearly one of the biggest questions investors have asked us and all the analysts as well. And we just made a conscious decision, honestly, 5 years ago that we had to diversify even though -- it's kind of funny, right? Repligen in 2014, the strategy was diversify beyond the Protein A ligand markets and the growth factors. That was kind of the first diversification. And when you look at the protein strategy, it was diversify within proteins. First comment I would make is we developed a really good relationship with the folks at Danaher, Cytiva and that's -- it's healthy. And the deal that we signed is a really nice win-win for both Cytiva and for us. So I feel like we put ourselves in a good position with Cytiva. We're in a good position with Millipore. We have a good relationship with Purolite. And we're continuing along the journey that for Repligen to be a bigger player in this world, we have to have more control of the content, right? And so we have a great relationship with Navigo. We've generated what I would say, market-leading technology, differentiated products. And now by adding Avitide into the equation, we get a ligand factory that allows us to target areas that we haven't been able to target up until now. So we're focusing on gene therapy, but we have other focus areas. So if I went out over 5 years, the move on Avitide is a really important move the continued work with Navigo and the focus that they have will also bear fruit in terms of new products. And I think we're in a very good position with the proteins business in terms of where it will go. And I fully expect that Cytiva over the coming years will continue to bring capacity in-house above and beyond what they have right now. But I think we have a balance and we have a path forward where we can offset any lost revenue with gains that we would get through the other partnerships and other programs we have in place.

Okay. Okay. That's good. Let me -- I'll move to the COVID side and give you the question that you knew you weren't going to get away with not answering or at least not getting put to you anyways. The 2022 outlook year at this point, as it stands today, is for over $200 million. How should we think about that when we think about the fact that right now, your order book basically has 3/4 of that $200 million total in it. Is there anything you can kind of give us in terms of the way that you think about orders going into next year? And then in order to stave off the mail that I'll get if I don't ask the question, any early thoughts on how 2023 might trend from the COVID vaccine standpoint?

[indiscernible] because I like how you turned the at least to over but that's okay. It's a bit of a -- obviously, where we are on the order book gives -- hopefully gives investors, gives people like yourself down some confidence about where we can be next year. I do think that the upside in 2022 will come from what -- how fast will the vaccinations roll out into those countries, those regions where it's low vaccination rates today. Are we going to see kind of little bit of weariness about COVID vaccinations? Are people going to start saying, "Hey, look, I'll take the pill if I get sick?" I still believe that there is a real need. I think if most people logically see why there's a real need to vaccinate the globe. But upside is going to come from how fast it gets rolled out, be some new variants emerge, right, over the course of time. Do we go to an annual kind of vaccination approach where it's just every year, you're going to get vaccinated no matter what? And then it's just in the U.S. and other regions, it's the boosters. It does appear that there's sort of -- every day, every week, I hear about someone who just got the booster shot. So I suppose that's a positive sign that by the time we get to the end of the year and early next year, that's going to be more boosters available in the U.S. for everyone. So look, from my point of view, I think we feel pretty confident about the orders where we're at. Obviously, the markets have to comply, right? And that's really what the story of 2022 is going to be about. And to your question from a few weeks ago, and that's kind of what we'll set up 2023 as well, which is will the world move to an annual vaccination. If it does, then there really is -- there's not going to be a huge drop off in COVID revenue. If for whatever reason, it's people just say, "Hey, look, I've been vaccinated or you don't need to get -- a booster shot." It's now every 2 years or every 3 years, well then that obviously changes the equation. But I don't think anyone knows right now. I think we're focused on 2022, focused on finishing Q4 and then focused on 2022. But yes, look, I think we've got the right order book for a good COVID year next year.

Okay. That's helpful commentary. We will just have to see when it comes to some of the stuff you just really don't know until you're closer. Maybe just -- we have a couple of minutes left. I want to ask you about M&A and then just hiring, I think, is probably a good thing to touch on. On the M&A side, you guys have done a really nice job of finding these smaller but meaningful assets that maybe are not big enough for the big guys, but for you guys and strategically, it made a lot of sense. Is the pool of those assets still decent? And is there anything you can say about how you might look to M&A and acquisitions in 2022? I mean, it seems like it's something that's sort of part of your consistent strategy, but I'd love to hear how much of a priority it is for you right now.

Yes. It's -- I don't think the pool is any different in 2021 versus 2020. I don't think the pool of opportunities will be that much different next year. I think the big difference, honestly, now is that, I would say, the vast majority of the opportunities are going through banks. So therefore, it's more competitive, and you have to be ready with your pitch and why Repligen makes more sense. So like Avitide, for example, was an auction-based process. and you have to win those auctions, and you can't win everyone, and that's what makes it harder. I think we have a good strategy. We have a strategy by business we're looking for, obviously, technology plays that make sense for us. And you kind of can see over the last 18 months that we've developed a fluid management kind of business based on some M&As. We've doubled down on our system strategy. We've strengthened our hollow fiber business. And now we've kind of doubled down on our proteins business. So it's not by -- it's not random in terms of how we're doing this. I think we have a solid strategy across every single business in the company. And as assets become available are ones that we really, really like that we can get in before a bank gets in, we're active, right? And we'll continue to be active. On the employment side, maybe just to answer your other question on employment, I think the whole bioprocessing industry -- and if I take just the New England, Boston area, I mean, I would say the challenge that everyone in our industry has faced -- are facing is just the hourly workforce, and that's probably the biggest challenge because there's a huge demand for hourly workers. And when you're in a concentrated area, you have to continue to try and differentiate yourself even at the level of bringing in all our hourly workers. So we really think about what are the benefits we can provide, how do we differentiate ourselves. We're going to continue to do that. It's an important part of our hiring strategy.

Okay. That's great. I'm going to leave it there. It's 8:30 at least on the East Coast here. So I'll say thank you to both of you guys. If I don't talk to you beforehand, have a great Thanksgiving holiday.

Yes. Thanks, Dan.

Thank you. [indiscernible].

[indiscernible].