Repligen Corporation (RGEN) Earnings Call Transcript & Summary

Hello, and welcome to KeyBanc's 2022 Healthcare Conference. My name is Harrison Schrage. I'm an Equity Research Associate on Paul Knight's Life Sciences team here in New York. Here, we'll be discussing Repligen with Jon Snodgres, CFO. [Operator Instructions] Pass it off to Jon for a brief overview of Repligen.

Thanks, Harrison, and good day, everybody. Thanks for having Repligen at the conference here and for joining us today. Just to kick off, a few comments about the business, coming off an exceptional 2021 year. I think as most of you have seen our results in over $670 million in revenue in the year, 83% reported growth, 71% organic growth. And I think one of the key highlights I want to continue to remind people of, is our base business performed very, very well, excluding the COVID business, based at about 38% for the year, really driven by the strength of the monoclonal antibody markets continuing as well as the uptake here from gene therapy, which is also performing very well. Our strategy, I think most of you know already, has been really to differentiate ourselves with leading technologies in the market. And we've continued to do this here -- back in 2021, and we'll continue to do it going forward. A few of the key product launches that we have through R&D that really stand out are the FlowVPX system, right, for protein concentration measurement and GMP compatibility now. That new product has taken off well and gotten a nice uptake in 2021, expected to do really well in 2022. I think the other -- another one is the high pH ligand that we launched. This is great for areas where our customers have high aggregation challenges and caustic stability challenges in their purification suites and this particular Protein A ligand really helps customers with that area. And that represents about 25% of the monoclonal antibody drug candidates that go through the pipeline. So we think that's got nice potential here for a nice upside in the future. And then finally, thirdly, I'll just highlight the configurable artisan chromatography systems that we've launched. Obviously, we've tried to get away a little bit from the customized systems, so going to more configurable platforms of the various sizes which can be upscaled through picking various configuration options to make those -- turn them into Porches or Ferraris instead of Mercedes or whatever. So anyway, that's one of the other products that we think has done -- is going to do very well for us. I think also, just to highlight, in M&A, we've had another good year in M&A. We completed 3 different acquisitions and integrations here. First is Polymem. And this really expanded our capacity in the area of hollow-fiber filtration manufacturing. It was badly needed to support our business and that posed well for us. And it also brings us some really interesting new technologies that we're working with for potential new products down the road. BioFlex acquisition closed in December, again, adding into our fluid management portfolio for Flow Paths and things of that nature, which we think is going to really help bolster that business and continue to grow that fluid management business, which we've talked about being a new product category for us as we move here into 2022, with more information to come on that in our Q1 call. And then finally, Avitide, the acquisition that we made back in September really helps strengthen our proteins portfolio. We've already launched here in Q1. This year, 3 new chromatography resins for [ AEV ] manufacturing or viral vector manufacturing in the gene therapy space, which we think are going to do very well. So nice uptake there on M&A, and nice execution on the integrations with what we think is a lot of potential down the road. I think another area we spent a lot of time on in 2021, and we talked about it a lot, is expanding capacity. So whether it be for our filtration products, we've opened up our Breda facility last year. That's operating well on chromatography side and expanding capacity in generally every product area or major product area that we have to make sure that we can serve our customers in a market that's growing really nicely. So I think all in all, this -- these things position us really well as we roll into 2022, the tailwinds from a strong mAbs market that we're seeing, the uptake in gene therapy, and we expect that area to be more and more successful as we go forward through clinical trials and whatnot. And we're -- we've guided back in February for 2022, reported growth of 19% to 24%. Organic growth of 18% to 22%, and that would include a base business growth of 20% to 22%. So nice growth there reported or at least guided. And we think that will be nice profitable growth for the company as we go forward. So our goal and mission over the last few years has been to get to $1 billion in revenue by 2024. And we think the backdrop of the markets, the execution that we're doing, the new products that we have and are continuing to develop really position us nicely to get to that $1 billion in revenue by 2024. So that's kind of an opener for you, Harrison, and I'll let you kind of take over with questions.

Great. Yes. So I guess just getting started, what percent of Repligen sales would you say are from products that are completely new technology. So thinking very little competition compared to probably home brew solutions, thinking of OPUS, FlowVPE, ATF technology, in particular?

It's a great question, and you've really touched on a key element of our strategy with this question. So we've had great success over the years, really focusing and addressing pain points in the manufacturing processes that our customers have. And we really address these with better technologies that help them drive higher yields in their manufacturing process, higher efficiencies, more automation, et cetera. So that would be represented by some of our filtration products and the FlowVPE, as you mentioned here. We also, obviously, several years ago, launched the OPUS product line. When -- OPUS is chromatography column packing, right? And so prepacked columns. Well, what this really does for our customers is it puts that work gives it to us and it really lets them focus on what they're good at, right? Which is developing and manufacturing biologic drugs. And so it kind of takes that off of their plate, and it's been a great offering for the company. So but to kind of touch on your question a little bit more, you asked about what percent of Repligen sales are from products that don't have a lot of competition. One metric that we have put out there was in our February earnings call for 2021. We indicated that about 25% of our 2021 revenues came from products that were launched in the last [ few ] years. Now if you're in the automotive industry. You're saying, hey, that doesn't look so great," but in our industry, which has really, really long lifetimes for products as you get specced in through commercial. It's really hard to be specced out. So that's a really compelling number for us to have 25% of our products coming from products that were released in the last 7 years. And that velocity of those new products coming out is just increasing as we continue to grow. So it's going to continue to be part of our strategy going forward. I think we've executed on it well. So you should continue to see a lot of new innovative products coming out of Repligen.

Got it. So cell and gene therapy markets comprise approximately how much of your revenue also, why is this segment -- why is this segment growth become significant in terms of Repligen products and market dynamics?

Yes. So cell and gene therapy is a really important market for us. Overall, we had sales of about $71 million in 2021. That's about representing about 40% growth in '21 versus 2020. And then overall, it represents about 11% of our revenue. So a growing area, for sure, for Repligen. And we think these markets are still in the early days of maturity. There has -- success has been relatively muted so far as people are learning the science, learning the manufacturing processes around this technology. And so we've been working closely with customers to try to get involved with them early to build out their manufacturing processes. Many of our products that we use for monoclonal antibodies or other drug classes are easily portable over into gene therapy. And then as I mentioned earlier, with the AV resins that we launched from Avitide in the first quarter here, we're developing products specifically for viral vector manufacturing, plasmid production, et cetera. So really a key area for us as we focus going forward. I think another key thing that we've done with the gene therapy area, we've opened a gene therapy lab here in Waltham, where we bring customers in to share with them data that we've derived from gene therapy applications data. We work with them to trial and error the product and see how it works with their particular drug processes. So that's given us another arm to work closely with customers. And I'd say, in our area, having best-in-class products, great applications data, really nice customer interfaces where we work with them and a best-in-class commercial team, I think, puts us in a great position to continue to execute, grow market share in this area. And I think our historical success bodes well for how we plan to execute in the future.

Yes. So ex COVID, the market seems to be accelerating from 2019 growth levels, wondering would Repligen kind of concur with that?

Yes, we do. So I think we take this back -- strip it back. Strength in monoclonal antibodies has been great. That market has been really, really strong for a number of years. I would say, if you look back 8 out of 10 years or 9 out of 10 years, this market just continues to grow exceptionally. And then typically, there might be a rest year in between where things stabilize a little bit and flatten out a little bit. But that's a really good indicator for mAbs going forward, we believe. I think also gene therapy, as I mentioned, continues to grow really well. And we've got a lot of new products coming out for gene therapy. Our existing products serve that market really well. Our commercial teams are very adept at selling these products into the market and working with our customers and our field applications people as well. So we continue to have success here. We think the success is going to continue. And the strong markets that we're seeing and strong execution that we're seeing are just great tailwinds for us as we go forward.

So I guess, in general, what would you say is driving overall market growth? Is it consistent growth in monoclonal antibodies and the emergence of cell therapies? We're trying to understand is mRNA and RNA related modalities? Are those really a factor yet?

Yes. So absolutely. The mAb market, as we've touched on, doing very well, gene and cell therapy. And I think gene therapy is a little more relevant or more significant for us in this space, has continued to emerge as you look out at the number of candidates out there in development or in clinicals right now. There have never been more monoclonal antibodies or gene therapy candidates out there. So these markets are really set up to grow in the long term. We think the success rates are going to go up as we've talked about. And if you look at mRNA and RNA. So obviously, this has been an area of success for COVID vaccines. And it's newer science, newer technology. And we've done well at these areas, right? Through the COVID vaccines. So we think we're well positioned to do well in the future. I don't think it's going to be a short-term pop in the revenue. And of course, we parse out the COVID revenue separately from our gene therapy even though it's a similar area of technology. But we think the uptake in this area is, for our industry, relatively speaking, is going to take off pretty fast as it did in gene therapy. But practically speaking, pretty fast and our industry takes time. So in the short term, probably no big pop from mRNA. In the long term, we feel like we're well positioned. And with our products, and we think that there's going to be a nice opportunity for us. And we think it's going to be a real factor in vaccines and drugs going forward. So excited to be a part of it. I feel like we're positioned well and excited about what the future brings with mRNA and RNA.

Now are you starting to see any order cancellations on the COVID order book side, we're kind of wondering, are we past peak vaccine demand? And what do you expect to see in terms of 2023 growth, again, especially with the mRNA types of customers?

Yes. That's a great question. COVID dynamics are going to be -- they're really going to be dependent on global demand, new booster approvals, what's going on with variants, the global evolving situation, right? Right now, we're starting to see Europe and Asia rise up again with rising cases. So those are all going to be factors at how the order book shapes up and the revenue shapes up for this area. We previously indicated and still believe that any vaccines that aren't successful against Omicron are probably not going to have significant growth and are likely to drop off. So that's an area that we feel pretty comfortable talking about. But we're continuing to watch this like everybody else. We'll give an update on our Q1 call coming up here in late April and bringing everybody up to speed on what we're seeing in the overall market for COVID. But as of right now, that's the best information that we have to share.

Got it. So earlier you mentioned the plans to make incremental step changes in the capacity across all of your product lines really. How is that capacity expansion coming along? And I think as kind of a follow up, or additionally, can you speak to investor concerns about over capacity and the ability to meet that demand and how should we think of that?

Yes. So we're -- I would say we're at a stage we're about 2/3 of the way complete with most of our capacity expansion. We spent, I think, $23 million back in 2020 in CapEx. We spent $71 million in 2021. So you can see the ramp up most of that really driven by capacity expansion. And then coming into 2022, we've indicated $60 million to $70 million more of CapEx. So a lot of projects underway. We've made huge progress in capacity expansion, as I think the entire industry has. And so we're feeling good about where we're settling out going forward and you should be able to support the industry and the demand in the markets for many years to come. But in terms of our overcapacity, which I think is something a lot of investors are asking about. In terms of overcapacity, I mean, we want to set ourselves up for the long term. That's our focus, building out -- and when you look at physical capacity, you're building out footprint, you're expanding footprint, you're putting equipment and facilities in place. And so those are really kind of longer-term plays. Those are going to take about 18 months to really get those things set in. And then you start to add people in as you titrate people in as the demand comes. So a part of this is fixed. Part of it is variable based on that scenario. And so we'll manage the variable piece as we go forward. The fixed piece, we're going to be -- we're going to have that out there, and we're going to be ready for volume when it comes in. But we know our markets very well, our industry very well. We know it's growing nicely. We know that we're growing above market in most areas. And so if we can continue to do that, even if we have some overcapacity over the years, we'll consume that over time. And again, our particular focus is on the long term, continuing to have enough capacity here to continue to drive and sustain strong growth -- above market growth. So that's really our position on it. And we'll manage again the titration of people in and control costs that way as we go forward.

So recently, as you mentioned during the intro, Repligen has been very active in M&A. We assume these acquisitions were to address your growing end markets. But I was wondering if you could give some additional detail on Avitide and BioFlex in particular and what made those 2 such strong strategic fits for Repligen?

Yes. So I'll start with Avitide. We're really excited about this deal. Avitide has an unprecedented number of protein libraries, right? That can be selected from for ligands and resin candidates for multiple classes of drugs. And so they're much deeper in terms of opportunity there for selection and development of different ligands, resins, et cetera, across modalities. So that's exciting. And their capability there is just really unprecedented in the marketplace. So really excited about that. It solidifies the strategy that we put in place around proteins 2 or 3 years ago to really own the technology there, not to be a contract manufacturer for other companies, other integrators. And so I think we're well on our way there. And this is just another step along with extending our contracts with Cytiva, launching new other ligands through our partners in Germany, along with these products here coming out of Avitide. So that one there really solidifies the protein business going forward. The BioFlex acquisition, we've been getting more and more into Flow Paths. It's an area where we think there's a lot of fragmentation in the market. There's an opportunity to consolidate -- and the more components you can have in the Flow Paths that you're pulling together, we think the better the financial benefit will be. And so this particular BioFlex is a nice operation. I think we had previously said it would be about $13 million of revenue in 2022. So it's a meaningful in terms of our revenue overall and just gives us additional pieces of the puzzle as it relates to fluid management, where we think we can get in and grow that business profitably over time. So just a couple of nice bolt-ons there. And then, of course, the Polymem, which you didn't ask about, but that one really put us in a great position from a capacity and technology perspective and hollow fiber. So really excited about all 3 of these and can't wait to see how these evolve over time with us.

Yes. So I'm going to move on to some questions from our audience. Just a friendly reminder, if anybody has any questions, just ask them in the question box below. So this is one that we get from a lot of investors. Are you seeing the biotech funding slow down? If so, what therapeutic area? And how does that really affect you guys and look from your perspective?

Yes. So most of our customers are a bit downstream from where the funding is going to have a short-term impact. Fundings have a shortest term impact in research labs and things of that nature, which is a very small part of our business. We would wind up seeing a sustained reduction in investment there, a few years down the road, right? Not really in the short term. There's plenty of drug candidates out there now, plenty going through clinical right now. And so this shouldn't have a significant impact on the business. And in terms of specific areas, I'm not familiar, familiar enough with the areas that that's going to affect overall. But again, it would have to be a pretty long-term sustained impact to have a major, major effect on our business. So [ it's not something ] we're overly concerned about.

Right. So I guess kind of as a follow-up, another one would be, I guess, if you could just kind of give us an idea of your customers, what percent would be preclinical, clinical, commercial? And how do the revenues kind of flow through? Or how do the revenues change as your customers go through these different phases?

Yes. So I think you have to look at this with and without COVID. I think on a -- excluding COVID, about 65%-ish of our revenue would be in the clinical area or preclinical area. I'd say most of that in clinical and about 35% would be commercial. If you factor in the COVID vaccines, which are mostly commercial, then that metric shifts, it's about 55% in that clinical, preclinical and about 45% in the overall commercial market. So I think the upside for investors on that is the more that we have in clinical and preclinical means the more opportunity we'll have to kind of ride that wave towards larger volumes, larger sizes of products. moving through into commercial. And obviously, the more activity that moves that way, north into commercial. There's just more volume and more revenue for us. So I still feel like we're really well positioned. Again, being a little bit newer company, newer technologies have come to market here for -- over the last 7, 8 years, which we feel like we're well penetrated in the clinical and preclinical space, getting platformed into customers, all those things that we want to do on the commercial side.

Got it. So is the ARTeSYN cross-sell cadence occurring at the level originally anticipated from the acquisition that you guided for FY '22?

Yes. So I think on the ARTeSYN front, the opportunity there is to start to integrate our technologies in flat sheet filtration and chromatography and with the ARTeSYN systems. And you can throw VPX -- FlowVPX into that category as well. So it's early days in terms of those technical integrations, but those are areas we're definitely focused on. Those are areas that are going to drive revenue by really removing manual steps out of the manufacturing process, kind of coupling different functionalities or steps in the manufacturing process together. So we think there's going to be great upside on this as we go forward. And I think things are moving according to plan there.

Okay. Now in terms of that -- the increase in capacity. Are you seeing demand come for that capacity? Is it booked -- about what percent of the capacity would you say is already accounted for?

Well, that is a very challenging question to answer because we've got so many different products. But I would say, in a lot of cases, again, we're building out that footprint. We're building out the factories with fixed assets that are needed. The order demand will come. It's -- we're trying to be 3 to 5 years ahead of order demand. So no, that demand is not always in every case here. In some cases, it's more penetrated than others. But we're really trying to position ourselves so in 5 years from now we're still growing at a rate much above market, have capacity to take on volumes where potentially with strong lead times, best-in-class lead times if we can get there to win in the market. So it's going to take time for that to happen.

Now when you reach your target of $1 billion in revenue, what do you assume the operating margins to look like?

Yes. So I think we talked a little bit -- we've had an incredible run on gross margin and operating margin the last 3 years. I think we're up 1,180 points on adjusted operating margin over the last 3 years. We are expecting this year with all the capacity expansion investments that we're making to take a little bit of a step down in margins. And so that, I think, over time, will reverse. And as we fill up the capacity that we're building out, we'll be able to continue to grow margins. But our goal is to continue to be, over time, a 30% plus operating margin company. We don't give specifics on that on a year-by-year basis per se, looking forward. But I think that's a really reasonable goal. It puts us up in that top quartile of life sciences companies where we want to be. So that will continue to be our thrust going forward. And this year, we finished -- or this past year, we finished just over 32%. So I think we're -- we've shown the ability to get there. And I think over time, we'll be able to sustain up at that level.

Got it. This will be a final reminder to the audience. If you have any questions, please submit them. We're running out of time here pretty quickly. But one of the questions that we've received in the chat, saying that the COVID guidance seems a little unclear with peers saying that orders are turning negative year-over-year, but you're still seeing growth. What kind of COVID expectations are built into guidance this year? And can you provide any updates to what would drive upside or downside to the COVID guide?

Yes. So I understand what some of the peers are saying. I think for 2022, some of them are saying that levels of growth will be below what they have been in the past. We totally understand that. When we guided, we said we achieved about $190 million of COVID revenues in 2021. We guided $200 million to $220 million with $180 million of orders in hand already. So that's kind of where we've guided. We haven't really talked about given any updates on that guidance since our earnings call. So we're pretty much staying with that guidance. And we'll see, again, how the world responds here, what new booster approvals. I mean we just saw Moderna come out today with an [ ask ] for the Swiss government or big potential order book for that. They're asking for a fourth dose in the U.S. So we're going to see how those things evolve. But right now, we're holding to our original guidance that we gave back in February and don't have -- we'll give you more updates here in April when we have our earnings call.

Okay. One that we just got -- kind of taking a big step back here from a high level. Wondering if you could provide a high-level overview of the role that filtration plays and bioprocessing and bioproduction, both upstream and downstream and how these use cases are different for clinical versus commercial drugs, specifically as it relates to Repligen.

Okay. Well, I'll tee up the second part of that question first [indiscernible] for me to answer not being a highly technical guy outside of accounting. So I think the clinical versus commercial role of the filtration are going to be very similar. It's just in clinical, you're going to be operating at smaller sizes. You're going to be doing less runs, et cetera. But the idea is always the same, right? It's yield maximization. It's efficiency. It's where you can get automation. Any of those things play into both clinical or commercial location. So I think that touches on that. But the filtration role in bioprocessing overall. And I'll kind of focus on mAbs, mAbs is probably 60% of our revenue, right? It's the biggest class of biologic drugs. On the front end, we can use filtration products in seed train, which we talked about our ATF presence that are on seed train, also in the, I would say, clarification area and harvest area coming off the bioreactor with our ATF technology, our TFDF technologies positioned really well in the upstream part of the manufacturing flow. If you look downstream, there's all kinds of filtration steps. But obviously, we have purification with OPUS, right? We're well positioned there and really trying to position our ARTeSYN systems there as well. And then also then as you move further downstream in the concentration steps, et cetera, you get into flat sheet filtration. They also use hollow fiber there, they use hollow fiber upstreams. So we're really nicely positioned. I mean we have a lot of products and it's our broadest product category in the company in filtration. We grew it well over 100% I think, at 131% in 2021. So that's indicative of how our products basically fit into some of these new drugs -- newer drug classes, et cetera. And we think we've got a fantastic, differentiated game changing portfolio for our customers there.

Okay. We've got just 1 minute left. So one more final question. How are you guys thinking about M&A looking forward?

Well, we're always thinking about M&A. So I think we've done now 11 M&As since 2014. It's been a big part of our strategy. What we like to do is take M&As. And in a lot of cases see if we can then take that technology and differentiate it, integrate it into our other product offerings, et cetera, over time through our own internal R&D efforts. And I don't think that's going to change for us. You've seen last year, we had great broadness and depth in what we acquired with Polymem on the filtration side. We bolster our proteins portfolio significantly with ARTeSYN -- with New Hampshire -- Avitide, sorry. Too many [ As ] there, with Avitide. And then, of course, we've strengthened our fluid management portfolio with BioFlex. So there's lots of opportunities in different areas that we can continue to drive M&A and it should be considered a key part of our strategy going forward as it has been in the past.

Got it. Well, that's all the time that we have today. Jon, thank you so much for presenting. We really appreciate it. Audience, thank you guys for attending and for all the great questions. Jon, I look forward to speaking again soon.

Hey. Thanks a lot, everybody. Have a great day, and I appreciate you having us today.

Absolutely. Bye-bye.

Bye-bye.