Repligen Corporation (RGEN) Earnings Call Transcript & Summary

All right. I think we'll get going. Good morning, everyone. We'll get started with our next session, which is Repligen. Good morning. I'm John Kreger, the analyst at Blair that covers the company. I am required to tell you that for -- if you want to see our disclosures, you can see williamblair.com. Let's see. Tony Hunt, the CEO of the company, will be presenting. And from a logistical standpoint, he's going to walk through a presentation over the next 30 minutes. And then for anyone that wants to take part in Q&A, we'll probably have a few minutes to do that here in the room, but then we'll go upstairs to the Maher Room for a breakout. So with that, I will turn it over to Tony.

Great. Thanks, John. And Good morning, everybody, and it's a pleasure to be here. And thanks to John and the team, William Blair, for this opportunity. Give me one sec here. You guys having a problem with the -- this could be fun guys if I take 5 minutes to move the slides. Okay. So what I thought I'd do is spend a few minutes and bring you up to speed on what's happening at the company. It's been pretty exciting start to 2022. When I look at the last 8, 9 years that I've been at the helm at Repligen, I think one of the things we've been very successful in accomplishing is getting our customers to a point where they truly see us as the innovation leader in bioprocessing. So we've kind of captured that position in the market. We've done that through products that are driving efficiency and manufacturing yield improvement. And if you look at the timeframe, like last year, we finished the year at $671 million in revenue, 71% organic growth, all coming from what I would consider a portfolio of really highly differentiated and innovative technologies. If you look at our CAGR over the last 5 years, it's been 45%. And if you take COVID out of the equation, it's 37%, well above the industry growth rates. One of the things that I'd like to judge us on is if a new wave comes through of opportunities, does Repligen capture those opportunities? So if you look at how we've diversified our customer base, clearly, gene therapy and COVID have been 2 areas that have been very hot in bioprocessing over the last few years. And last year 38% of our revenue came from that combination with 60% of our revenue coming from biosimilars and mAbs, which is still the biggest driver of growth in our market. In terms of how you differentiate yourself in this marketplace, I feel like the way to do that is through disruptive technologies. And if I look at all the products we've launched since 2014, there's about 10 that I consider are really disruptive, whether it's single-use ATF or it's the ARTeSYN systems or the FlowVPX, lots and lots of products we've launched. But 10 really are truly disruptive in our marketplace like TFDF and 25% of our revenue last year came from those 10 products. Now when you think about as an investor about what's the future look for us, I think what's really great is that when you look at our pipeline of accounts that we're working with and you look at what percent of our revenue is coming from commercial drugs versus what percent of our revenue is coming from clinical pipeline. 35% of our revenue last year came from commercial drugs, 65% from clinical and that's without COVID. If COVID were factored in with the vaccines that were in, that number would be 45% commercial, 55% clinical. So we're really in good shape. And you're only as good as your markets. Sorry, guys. You're only as good as your markets. So when we look at the biologics market, the underlying trend is very positive. So on the top, we just kind of split it into 4. We've got COVID vaccines and therapeutics, cell and gene therapy, monoclonal antibodies and then emerging modalities like oligonucleotide, exosomes, mRNA. The COVID piece, as you know, and as I pointed out back at the end of April when we did our earnings call, there's definitely a drop off this year and a further decline next year. But overall, still contributing $190 million of revenue to Repligen in 2021 and it will be about $150 million in 2022. Cell and gene therapy space continues to be very robust; 1,200 clinical trials, 7 approvals, about $75 million, $76 million in revenue last year for the company. It will be over $100 million this year, off to a strong start, obviously, in Q1. And then monoclonal antibodies, 1,200 drugs in clinical trials. It's still the driver of growth in our industry, greater than 120 approvals and over 60% of the revenue last year came from mAbs. Then in the world of emerging modalities, particularly excited about, we've done a lot of work with exosomes. I think mRNA outside COVID is here to stay, expect to see a lot more work done on vaccines and on cancer therapeutics that I think is going to drive a lot of growth for the whole bioprocessing industry over the next 5 to 10 years. So when you look at our addressable market then, it's really around $8 billion -- a little north of $8 billion as we enter 2022, in a $22 billion market. And within that $8 billion, we took our 4 franchises and divide them up with filtration being our biggest franchise with a TAM that's north of $4 billion. Our market share here is about 9%. 2021 revenue was a little over $400 million and our 3-year CAGR for our filtration business was north of 60%. Now filtration, in general, probably grows at that 10% to 15% average -- on average growth in our industry. And obviously during the COVID years, it's definitely north of that, probably in that 20% to 30% range. When we look at proteins and affinity resins, about a $2 billion TAM for Repligen. Our market share is about 6%. 2021 revenue was a little north of $120 million and our 3-year CAGR, again, greater than 30%. Process Analytics is a relatively new market for us through the acquisition of C Technologies. Again it's a little north of $1 billion in TAM. We have about a 4% to 5% share in that market, a little -- almost $50 million in revenue last year and the CAGR over the first 2 years that we've been in this market has been greater than 35%. Then finally, chromatography and market share here is about 12% to 13% of an $800 million TAM. Again 2021 revenue was a little south of $100 million, at $91 million, and our 3-year CAGR greater than 25%. So the take on point here is if you look at all our businesses, they've been growing really rapidly over the last 3 years, and that's really a reflection of the core technology that we've developed or we've acquired since 2014. So one of the things that you have to do in our industry is around how do you set standards, right? And so when we look at the biologics workflow, we split it into upstream and downstream. And what we try to focus on is the trends and the unmet needs. So if you were to summarize what are of the biggest challenges in upstream bioprocessing is what people call process intensification. So how can I get more out of my manufacturing process or drug development process than I do today? And we do that with products like ATF and TFDF and they are, by far, the standards now for doing harvest clarification or what we call process intensification. When you go downstream, really the trends downstream are all around scalability, flexibility, use of single-use technologies. And so if you look at our portfolio, we have a really deep portfolio of products in the downstream space, everything from new products like our AAV resins to the chromatography and filtration, Skids that come from ARTeSYN to the FlowVPX technology that comes from C Tech to our hollow fiber and our flat sheet cassette businesses. So we've got a deep bench of products in downstream, which really allows us to address the trends and create quite a nice market position for ourselves. So what's our strategy? So we have a sort of a 3-pronged approach to winning in the bioprocessing market. First one is around strategic M&A. We've done 11 deals now since 2014. We have very strict M&A criteria. I'll cover that in a few minutes. We look to really see how can we grow these companies that we acquire at a very fast pace through the first couple of years of ownership. We think it's really important to get off to a fast start and you have to understand where those companies need investment. So we spend a lot of time on that. When it comes to R&D, our strategy is about being first to market. When you're in an industry where there are 4 or 5 really big players, we don't want to be launching products that are me-too. We don't want to be launching products that are commodity-based. We want to be launching products that are, A, disruptive. We want to get first to market so that we get that technology leadership position and then eventually move into market leadership. And then the final piece is around operational excellence. You've heard us and our -- people in our industry talk about the importance of lead times over the last few years, continues to be important here in 2022. So big investment on the capacity side, but you got to match that investment on physical capacity, also with what you're doing with your commercial team. And so you'll see how much we've grown that team over the last couple of years to put us in a really strong position in the market. So just jump into the M&A piece. As I said, we have strict criteria when it comes to doing deals. So it always starts for me with technology leadership. That's kind of the first lens that I look at when I look at companies that we wish to acquire. We want to be able to strengthen core businesses that we have within Repligen. In some cases, we've moved in like C Technologies, we moved into a space that was in analytics, but that was an area that was very familiar with and felt like it was a piece that was missing in our portfolio. Typically the companies that we acquire are -- need to be in -- they're underinvested in certain areas. Most of the time, that's actually in the commercial organization, for example. So when we did the C Tech deal, they had one salesperson with $24 million in sales and a bunch of distributors. We're able to turn that around to be 10, 12 salespeople within 6 months and move away from the distributor structure. So when you can identify where there is an area where a company is underinvested in, you can put that focus in the first 12 to 24 months and really get off to a good start. In terms of revenue growth and margins, typically looking for companies that have strong revenue growth, it could be regional with margins close to what we have at Repligen today. And then obviously, for us, we want to make sure that within the first 12 months, our first full year of ownership that we get to be an accretive on an adjusted EPS basis. So if you take a look at the 4 of the companies that we acquired since 2019, I spoke a little bit about C Tech, which was our analytics business, very unique technology. We invested in the commercial organization and we focused the R&D on what we felt was the most important product in their portfolio, which is the FlowVPX technology, and you'll see how that got launched over the last 12 months and has done quite well. ARTeSYN, a really unique company in terms of chromatography and filtration. Skids are systems, again, that was a very custom shop. We realized that what we really needed to do there was take that custom approach to selling to customers and go with a standard offering that could be configurable. So very much like the base model car with features that you can add on as you need them. Again, so we invested operations there in R&D. Polymem, we did last year. So that was actually an industrial filtration company. So kind of unusual for Repligen to move into kind of water filtration. But what we saw there was this capability to manufacture hollow fibers at a much higher, larger scale than we've ever done or people even in our industry have done. And they have really core competency and domain expertise in hollow fiber manufacturing. So that's worked out really well for us in terms of adding incredible capacity to our hollow fiber business and also bringing some real R&D expertise into the team. And then finally, Avitide, we've been known as the Protein A ligand company for so many years, but we were really a CDMO into the GE, Cytiva, Millipores of the world. So by doing the Avitide deal, we've essentially captured the content part in our markets. So we now have at our own hands and our own capability, the ability to make any ligands against any target. That puts us in a great position as the affinity market is really moving towards new modalities, whether it's AAV, exosomes, mRNA, lentivirus. And of course, we have matched up with, that is, of course our strategy around working with Purolite. So Ecolab were on before us, so we've been working very closely with those guys since the acquisition of Purolite to continue to drive the success of our NGL ligands into the Protein A market. So all in all the M&A strategy has worked very well for us. So just to sort of show you the progression, if you look at the 2014 to 2019, what was our strategy in the first 5 years? It really was build out the filtration franchise. So we acquired Refine, which gave us the ATF technology. We've acquired TangenX, which gave us the flat sheet cassette technology and then Spectrum, which gave us hollow fiber. Together those 3 companies basically were about $53 million from combined when we acquired them. And last year, that's $404 million. So you can see the progress we've been able to make by putting 2 or 3 companies together and really focusing on our market. So we've been really taking a fair amount of share in the filtration market with this portfolio of products. We also acquired in 2019 C Technologies, again, $25 million in revenue when we acquired, we were able to double that business, essentially double that business in 2 years. And that came from the investment that we made in the commercial organization and obviously bringing new products to market. So between -- in 2020 and 2021 -- sorry. So in 2020 and 2021, we did 6 deals. And when you look at those deals, they really were divided into a few areas. It was -- as we talked about the 4 franchises that we had, it was also obvious to us that we really haven't jumped into what we call fluid management, which is the Flow Paths that are used to run a chromatography system or the Flow Paths that are used in filtration. So what we decided to do was acquire essentially 4 companies that would give us a whole new fluid management division. So EMT gave us the silicon over molding technology. NMS gave us the fabricated plastic technology that allows you to hold products when you're doing purification. And then the BioFlex Solutions give us all the single-use clamping technology. On top of that, half of the ARTeSYN business is valves and liners. And so that also kind of played into our whole fluid management. What that gives the company now is recurring consumables. So every time we sell an ARTeSYN system, we're selling Flow Paths, which generate revenue in the region of $10,000 to $25,000 on a per-cycle basis. On the protein side, I chatted about Avitide, that was a really important acquisition for us. It gives us the content to play and affinity and sets us up for the next 5 to 10 years with an ability to really go after the non-Protein A affinity market. Filtration, I chatted about Polymem and the importance of the capacity. And then ARTeSYN, what was really nice about ARTeSYN is they were really the high-end filtration chromatography system provider in our industry. As I said, they were custom. We've now made them into a standard offering and married that up with our flat sheet cassettes or hollow-fibers and a lot of the other products in our portfolio. So I think when you look at what we've done over the last couple of years plus the acquisitions we did prior to that, we're really setup with a great portfolio of products that are doing well, setting standards in the industry. And we think a lot of opportunity for us. So how do we -- so when we think about now moving to the second part of the strategy, which is all about R&D. I said that we need to set standards. So if you look at the way we've segmented our portfolio, in the world of perfusion and clarification, which is the upstream part, we have 2 standards in ATF and TFDF. When you go downstream into purification with the acquisition of Avitide, now we have -- not only do we have the OPUS prepacked columns, which are a format, we also have all the affinity resins that we can start to put into that as the content. So that's going to come from the Avitide deal. When you go downstream into protein concentration and buffer exchange, we have basically optionality for our customers. You can either buy flat sheet cassettes or hollow fibers, which allow you then to solve your downstream challenges, whether it's in purification or it's in TFDF. As you go into the systems part, in the lower right-hand corner, we now have systems that can be used upstream that go with our ATF and TFDF, downstream that go with our filtration and chromatography products. So think about Repligen prior to really the ARTeSYN deal, we were very much a razor blade company. We didn't sell that many razors. So think about our system strategy with ARTeSYN and what we've evolved with our spectrum portfolio into a really comprehensive portfolio now of systems. And what this allows you to do then and why we put it in the middle is the flow path piece connects all of this together, right? So you can use all of these systems with different fluid flow paths, whether it's in upstream, downstream or analytics. And so that's really the beauty of adding in the fluid management piece. And then the final piece is that when you think about where our industry is going, clearly, 20 years ago, everybody was talking about PAT, which is Process Analytics Technologies, which has been able to monitor your manufacturing process in real time. It was a pipe dream, people really didn't make a whole lot of progress. But over the last 3 or 4 years, the amount of work that's gone into PAT has really increased dramatically. And we have one of the best PAT technologies in the Solo and FlowVPE that comes from C Tech. And we'll be integrating that into our systems and making that a standard offering for Repligen as we move forward. So moving now to the third part of the strategy, which is really the operational side. One of the big things that have gone on in our industry over the last couple of years is the need for increased capacity. And so we spent $70 million last year on increasing capacity, and we'll spend another $70 million this year. We have increased capacity anywhere from 3x to 9x over the last 2 to 3 years. That's a massive increase. And when you think about typically, and I've been in the industry for quite a while, doubling your capacity is a big deal. But when you're growing at 30% on average most years and in some years 70% to 80%, doubling your capacity is only going to end up with another headache 12 months later. So what we've done is we've really gone for anywhere from really 3x to 5x increase in overall capacity. We moved our hollow fiber business up to 9-fold. That was really to accommodate what was going on in COVID plus the increased demand as those coming from other customers. So our goal is best-in-class lead times. We're almost there. We're down to 8 to 10 weeks on average for most of our products here in 2022. But we also want to drive business continuity. Most of our customers want tool manufacturing of key products and key components that go into their manufacturing process. So we have that in place and we want to secure our supply chain. And we've done that through some of the M&As that we've done that allows us to really integrate and secure the supply chain for Repligen. Of course our customers want that too. So having dual manufacturing helps them in that way. In terms of the commercial side of our -- of the equation, if you look at how our revenue is split, it's pretty even between North America and Europe, above 40% each. Asia is about 20%. China, within Asia, represents about 10% of our revenue. When I joined in 2014, we had -- where it has 243, we have 3 people. We have 3 people in the commercial organization. Now we have 243 of which 200 are in sales, field applications and service and support. It puts us in a great position. We're really balanced across the regions right now. We know where we need to add. We put formulas in place as to when we expand in a region when we add more reps. And that's worked out really well for us. And I think when you have a portfolio of products like we do, it makes it a little bit easier to attract some of the best sales people, but it also makes it easier where you don't have a significant amount of competition in the areas where we play. So moving now to kind of financial performance. I'll start with Q1, right? We're off to a really good start to the year, about $206 million in revenue, split quite nicely with COVID representing about 26%, $53 million, down a little bit from Q4. I think Q4 was north of $60 million. Our base business, though, was about -- almost $150 million, and it was up 37% year-on-year. That's just huge growth no matter how good our bioprocessing industry is, growing at 37% on your base business is outstanding. So when you look at our margins, our gross margins went up in Q1 and our operating margins expanded as well. One of the things you're going to see as you go through the rest of the year is that when we hit the second half of the year, we are going to see the impact of inflation. A lot of the raw materials and components that we use to make our products had -- we purchased those in 2021 when prices were lower. Prices have definitely gone up and expect that you'll see some tightening on our margins as we hit the second half of the year. One of the big bright spots in Q1 was our cell and gene therapy. The business doubled year-on-year, just tremendous traction for. The products that I highlighted a few minutes ago have done very well in cell and gene therapy. Everywhere from our ATF product line and TFDF on the upstream side, our systems that we put in place and especially our hollow fiber filtration portfolio, all have done very well in cell and gene therapy. And then in terms of order book, one of the things you always want to keep a close eye in on is how well are your orders, how you're doing in terms of traction there. So we had 20% growth year-over-year and about 17% sequential. Probably most important, our book-to-bill in Q1 was one-to-one and having brought in a significant number of orders from 2021 into 2022. I think we're in good shape as we look to the rest of the year. So last couple of slides. So when you look at our guidance for the year, we did tweak it down a little bit at the end of Q1, really reflecting the softening that we were seeing and the COVID vaccine demand. So that's now down from $800 million to $820 million down to $770 million to $800 million, still really good growth, 15% to 19% overall. But more importantly, our base business is growing 24% to 31%. That's a tremendous growth overall for our base business. Expect our gross margins are going to be in that 57% to 58% and our operating margins in the high 20s; 28.5%, 29.5%. If you look at overall growth, last 5 years, 51% CAGR. I'd like to be standing here 5 years from now telling you about 51% CAGR over the next 5. I think that's probably unlikely given the impact COVID had over the last couple of years. But look, our adjusted EPS is up almost 5-fold in the same time period. I think we're doing really well as a company. I think we have -- I think we're really well positioned for future growth. We have technology leadership. We are the innovation leader in our industry. We have an addressable market that has increased significantly, close to $8 billion. We've got the strong base business that I pointed out a few minutes ago, growing 37% in Q1 and anywhere between 25% and 30% this year. We've added manufacturing capacity, which I think will be a competitive advantage for us as our lead times come down. We do have a really nice balance now of systems and consumables and flow paths that come from our fluid management portfolio and with almost $600 million in cash and cash equivalents. I think we're well positioned not only for future growth, but also as we target not only attaining $1 billion in 2024, but moving well beyond that. When you look at our business, as you can see this year, almost all our businesses are growing close to 20%. Our proteins is down as Cytiva has brought product in-house, but expect that that business will also start to move back into positive growth territory as we move into 2023 and 2024. So overall, I think just a great portfolio of products. I think the business is doing very well and I think we're really well positioned for the future. And with that, I'll stop.

[Indiscernible] one question, you've been in this industry a long time. Can you think back and reflect on recession? How is the bioprocess industry [indiscernible]?

Yes. I like the -- I've been in the industry for a long time. But I'll take that as the compliment. But yes, no, no, look at since 2000, I think there's been really only 2 down years for bioprocessing. One was 2009, obviously, coming off of the financial crisis. Most of that was inventory pull back. So when 2009 hit, pretty much everybody pulled inventory levels back to the base levels. 2017 was the other year where it was a flat year in the industry. Again, it was an inventory pullback. So if I'm sitting in the audience and thinking about where is the risk in this in bioprocessing for investors? Well, the good news is I don't expect that -- we had 2 poor years in '20. So I'm not sure there are too many other industries where you could look at it and say, if I go over the next 10 to 15 years, how many down years are you expecting to see? I think that's very similar to what we saw over the last 20 years, you're going to have a couple of years that are going to be flat. I think most of it will be driven by probably some inventory decisions where people just pull back. But it bounces back really, really quickly. This is a great industry to be in, a great market. People need drugs. And what's really different about us now versus, say, 10 years ago or 20 years ago; 20 years ago, everybody was talking about small molecule drugs and the emergence of large monoclonal antibodies. Ten years ago, everybody was talking about biosimilars and the importance of biosimilars. And then 2 years ago everybody was talking about gene therapy. And now over the last 2 years you've got mRNA-based vaccines. So if you think about what's at the disposal of large biotech pharma companies, you've got a lot more modalities, there's going to be a lot more opportunity. And standing here in 2022, I would be much rather to be here in 2022 than in 2000 because I think the future is incredibly bright for this industry.

[Indiscernible].

All right. Thanks guys.