Repligen Corporation (RGEN) Earnings Call Transcript & Summary

Here we go. Let's resume with the Life Sciences and Diagnostics portion of the Stifel Healthcare Conference. Happy to have Jon Snodgres, CFO of Repligen with us. Jon, thanks a bunch for being here.

It's our pleasure.

I think maybe the place to start would just be to have you make a couple of introductory comments that you wanted to relay, and then we can just jump into some Q&A after that.

Sounds good. And thanks for having us here. It's really a pleasure to actually get to see a lot of familiar faces today. It's been a while. So glad that you guys are doing the real deal here and having this face-to-face. It's fantastic. So I'll give a couple of introductory comments just to introduce the company a little bit. I think most of you, as I see all these familiar faces in the room, know us pretty well. But obviously, overall, our customers refer to us at Repligen as the technology leader in bioprocessing. And so if you talk to any of them, you'll get that feedback. And the way we do that is really targeting with our solutions for customers, areas where they have difficulty and pain points in their manufacturing processes. And so we really try to work to either acquire or bring to market through our internal R&D innovation products that really address some of the challenges that they have. And what's really critical to them is if you can save them significant time savings, if you can reduce hours and time they're spending, changing over processes from one drug run to the next in their facilities and things of that nature. And what really -- where the rubber really hits the road is if you can help them improve their product yields because that entails millions and millions of dollars of overall product, and that's a real benefit to them. So we do that by focusing on really single-use products for the most part or systems that help us drive single-use product use and the overall manufacturing products. And so we work with our customers to deal with those points, drive efficiencies, create products with smaller footprints that fit better in the smaller manufacturing facilities that are much more customary today, and drive those improvements for them. So really all about economics in their mind in terms of whether they want to adopt our products and ease of use. A few things that I did want to highlight that we're working on more a little bit lately is really looking at our Systems business. So we've acquired some assets, Hollow Fiber Systems with our Spectrum acquisition back in 2017. We followed that up with a customs system business purchase in 2020 of the ARTeSYN business. And so what we've been working on over the last couple of years is really trying to roll out additional systems, refresh the portfolio in Hollow Fiber, but also take the ARTeSYN product line, which is really a customized set of systems, and standardize those and make them configurable with standard configurations to be able to change the features on those products to where they work well for customers. And we're really rolling out products there into Chromatography, that will work well with our OPUS columns, as well as in Flat Sheet Filtration where we never really had a systems offering before. So it's really opening up some new markets. And those things are critical, because what we're trying to design in is single-use systems. And when I say that, the system will be reused over, but the flow paths that go on to those systems are all single-use products, and they'll be used one time, thrown away. And the idea there is to make it really efficient, flexible for customers to change over from drug run to drug run and save them a lot of time. But what it also does is connect those systems with fluid management to the ultimate products being used. So whether it be a Flat Sheet Filter or a Hollow Fiber Filter or something of that nature or an OPUS column for that matter, and they'll be able to control all the fluid management into and out of. So a big part of that ties into our fluid management initiatives, where we're -- we're really working to build out flow path assemblies as a big part of our business using the components businesses that we bought over the last few years. So that's one area where we've been highly focused. I think also, if you look at our Process Analytics business, the FlowVPX product line, we've been working to fill out the commercial team for that particular product line. We've completed the design of the new upgraded FlowVPX SYSTEM, which is GMP compatible. So now we have a system that can work all the way from process development all the way through commercial manufacturing. So it's scalable for customers, and that's a really big deal for them. And this in line, what we call advanced analytics, technology and capabilities are really big deal for them to be able to control their manufacturing processes. And at the same time, I think September 26 here, we just announced that we signed an agreement with another company called Daylight Solutions. And Daylight Solutions has a different light source of technology, it's mid-infrared technology and can be used in different areas to provide different capabilities like measuring aggregation, measuring the nucleic acid content -- excuse me, I've been talking a lot today. And so that's -- those are features and functionality that just don't exist in line in the market today, and we think we will also have a big play as we move forward. So jump into finally, the Proteins business overall. We've been working with -- working on content -- increasing our content on our overall Proteins business. So historically, we're an OEM provider to companies like Cytiva and Millipore whereas now, we actually own the intellectual property rather than just being a contract manufacturer. So really driving growth there, engaging in partnerships with companies like Navigo to develop product and help do that while still owning the IP. And then working with Purolite, which is now owned by Ecolab, to bring those products to market. So they can supply the beads, we supply the ligands. And those products are going into the market, competing with some of the big players in the industry on chromatography resin. So that's been really successful. We've recently purchased towards the end of last year the Avitide business in New Hampshire, which gives us a huge library of different resin possibilities that we can use to go out and develop and sell products into the marketplace. So the latest being 3 Chromatography resins that we'll be selling into cell and gene therapy, kicked that off in Q1 this year and start working on seating and giving customers to adopt those products in their processes. So -- and then finally, we've been, as we've talked a lot about, been building out capacity and dual manufacturing capability across different sites for our customers. That's something that they want to have for product continuity, and that capacity is critical to support the long-term growth. And I would say now with the drop-off of COVID revenues, we have a lot of capacity including that new capacity that we have, but we will fill that up over time. The industry is really strong and we'll continue to drive growth there. So strong finish to the first quarter. We grew 19% -- or third quarter, excuse me. 19% at constant currency in the third quarter, which is a strong performance. We grew -- we've grown 32% on a third quarter year-to-date basis so far here in 2022, so we continue to perform well. Over the last 5 years, our organic growth has been 26% on an average annualized basis, so really strong performance overall for the business. And I think, as you look forward to '27 and '28, we put a target out there of $2 billion for the company by '27, '28. It's hereby a lot of the things that we've been doing are very strategic and we're doing a lot of other things as well, pointed things into different product areas. We think we're well positioned to get to those numbers by 2027 and 2028, and just hang on for the ride here. Bioprocessing market is a lot of fun. I know there are some questions, concerns about headwinds and some different things in the short term. And rather than really covering those in depth, Dan seen this questions in advance, and I know he's going to cover those very well. So I'll hand it back to you to touch on those.

That was great, Jon. Thanks for those comments. And it does sort of highlight the fact that there is a lot going on in bioproduction land, be it at the industry level or for you, for your company in particular. Maybe just to start for the base business where I think people are gradually trying to train their focuses. The initial guide for the year when you gave it back in the fourth quarter of last year, it was for 20% to 22%. You're now tracking more to the low 30s. Maybe just give us a sense of what's been the biggest surprise year-to-date?

I think the biggest upside has come from two areas, really. I'd say the first one is Filtration and the second one being Chromatography. And on the Filtration side, here, we've really excelled this year, and I raised it in my earlier comments, is in the Systems business. So that particular business has really taken off for us. It's provided great functionality and flexibility and scalability for our customers, and so they really picked up on the Systems. And so that's been, I think, grown at a faster pace than what we had expected this year. So that's been a really nice upside. I would say on the Chromatography side, what we've seen here in the second half of the year really is the resins availability in the market has really freed up. And resins were very constrained from a supply chain perspective, and we're seeing that's now freeing up. And we've got a lot of backlog that we've been carrying for the last 1.5 years and growing, as we haven't been able to get resins to pack into column. So Chromatography through our OPUS columns has been a nice upside surprise for us this year, and we've got that reflected in our full year guidance now.

And presumably, that Chromatography tailwind, I guess if you could call it that a removal of a headwind, would carry into next year and sort of give you a good jumping off point for the Chromatography business overall?

Yes, we should still have some level of backlog carried in. We need to continue to produce orders and get orders in the door. But yes, it should be a pretty good starting point for us, Dan.

Okay. Maybe just specifically on some of the submarkets that you serve. Cell and gene therapy overall has been very good for life sciences tools companies. You guys are no exception there. I think you're on track this year for 40% plus, and that's above 25% or 30% in prior years. The industry is still in its nascent stages. So can you kind of help us with what you think the growth rate in cell and gene therapy could be, just given that we are slowly progressing towards Stage 2s a lot more than Stage 1s, and hopefully, the Phase III -- sorry, Phase IIIs versus Phase IIs and IIs versus Is?

I think if you look at the overall industry, there's been a lot of activity. There's a lot of candidates in the product development and clinical pipeline. What we haven't seen a tremendous amount of is product scaling up into commercialization from Phase II, Phase III type clinicals, and that's really going to be required for the industry to really take off and produce sustainable growth. So absolutely having a great year this year, growing at 40%. We're going to hit about [ $105 million ], represents a nice piece of our business at roughly 14% of our overall business. But we absolutely need the market to see more approvals go on. That said, we built the business out. This year, we've already, through the third quarter on a year-to-date basis, we have 20 customers that are over $1 billion in gene and cell therapy for us in revenue. So that's a big jump up from last year where we had 5 for the full year. So we are starting to see more and more product adoption by us -- of our products by our customers, and that's really starting to take off. So that should be an encouraging point for everybody because as you get into new modalities, you want to be spec-ed into those modalities, and seeing our growth there with those customers is a good reflection. But I would also say, keep an eye out also on CDMOs as you look at the industry. They're good, early indicators of how things are going to be going. They're basically taking on a lot of the smaller stage and mid-stage gene therapy companies and producing product for them, and they should be a good proxy for what we see coming here into cell gene therapy. But at the end of the day, approvals are the name of the game.

Yes. Is there something akin to an 80-20 rule in terms of what's -- which companies are generating the bulk of the revenues in cell and gene? Or is it more distributed across a set of companies in that?

Well, I would say -- I'd say it's pretty distributed. But if you look at 20 customers over [ $1 million ] for the year so far, and you look at a total pool for the full year of [ $105 million ], you do have a pretty good concentration there. But there are many, many customers, but I'd say maybe the top 70% are coming from the 20% of companies, and the remainders coming from some others. So maybe not even 20%, but directionally.

Yes, something in the ballpark. And then just sticking with cell and gene, and apologies for making you dig up numbers that are buried in a file somewhere. But in the effort of trying to understand the magnitude of the drivers that exist inside Filtration and inside Chromatography, can you give us a sense for where the split is of that cell and gene revenue base between those two businesses?

Yes. So a big majority of the revenue is coming out of Filtration, and the reason for that is simply because we have a lot more products in the Filtration portfolio. They can pick up on Flat Sheet, they can use Hollow Fiber, we have our systems there. So we have ATF, TFDF, so a lot of different products that can be picked from to use in cell gene therapy. So it just decreases the number of [indiscernible] and increases the amount of adoption there.

Let's switch gears a little bit and talk about the topic of the day or the topic of the last couple of months anyways, which has been this transition that feels like it may be taking place in the bioproduction world, as a lot of these companies or some of these companies move from vaccine production and a focus on vaccines to non-vaccine things. You spent some time -- you and Tony spent some time on the call addressing the issues. I'd love to just hear your take on as you've kind of absorbed, what's taken place coming out of COVID? Do you believe this to be a COVID-related issue, or do you think that this is something that we should think about as impacting the growth rate for the non-COVID business? And then the follow-on to that, and I'll give you a minute to reply here, is that do you think this is something that takes place over the next quarter or two and resolves itself? Or could we see 2023 growth rates being impacted by this phenomenon, if it in fact, is taking place in a meaningful way?

So I would say COVID phenomenon has affected everything around order rates and inventory build and different things like that. So as we work through the COVID programs, the government basically came in and said, you need to support these programs as a priority. And so as we work through those demands and volumes, we had to put aside some of their customers, right? And so with that being said, COVID inventories were built up. We all know that. I think that's pretty common news in the marketplace. On the non-COVID side, a lot of people really struggle to get product, right? And so there just wasn't product available to be shipped for them because you didn't have enough capacity to even hardly fill the COVID volume. So that would suggest that the inventory build situation, while we know there's pockets of it, we know there's pockets of it in our components business, right, overall. But some of this inventory build potentially could not have occurred because the product just hadn't been readily available for customers to get. But I would say on the flip side of that, the fact that customers weren't able to get product probably enticed them to want to get more product. And so I'm kind of flipping back and forth here and we don't really know all the answers on this, but it probably did induce some inventory buildup. And we started to see that as our order rates came in, they were buying over longer horizons of time just to make sure that they didn't run out of product. And so those two are kind of combated with each other. We don't know where really where everything ultimately fell out in this scenario, but we knew though there are pockets of inventory build in certain customers in certain products. The hard part about this is we just don't exactly know how much. Now when you think about this affecting order rates over the time horizon, we can kind of rely on what we're seeing in order patterns, right? So in order patterns, we're starting to see people now place more orders that are going to be shippable within 3 to 4 months than we had been before. Before, it had been 6, 9, 12 months out. So that's changing over. So that dynamics at play, that could suggest there's some inventory build as well. But we just honestly don't have great answers. I would say, based on the visibility we have there, some feedback we've gotten from customers in our Component business. We know there's some inventory build. It's going to take some time to work through that. And then we apply the logic of, okay, do we have any past experience in the industry where we've seen some of these inventory build and burns? And we do, and Tony Hunt, for example, has probably had 5 of these or 10 of these. His view is generally speaking, when we go through these phenomenas, it's a 3- to 4-quarter activity. And then typically, you'll start to get back to normalcy after that. But that's purely his view and based on what we're kind of seeing in the order rates. But it's a soft answer, Dan.

That's okay. I know it's developing.

Yes. We believe it will take a while, 3 to 4 quarters. I would say when we get to the Q4 earnings call and we give guidance for next year in February, I think we'll have 4 months more of history. Hopefully, we'll be able to give you a much better and more transparent answer.

If I were going to try and use Tony's words, and he's not here, I heard his in Europe probably taking advantage of the favorable exchange rate. But if you were here and you were talking about his historical perspective, that would say to me that his 3- to 4-quarter experiences would lead him to feel good about the second half of next year.

That's right, that's right. And so we're hoping to see based on that, and we reserve the right to be wrong because it's just not real clear. Things would start getting better towards the end of Q2 and into Q3. And I actually hope it's that early or earlier, but we'll have to see.

Yes, we will see. When I think about the way in which you've talked about growth for next year and the caveat would be, to your point, formal guidance is coming in, in the fourth quarter call. But he has -- Tony did talk loosely, and you mentioned loosely that 16% to 20% might be the right way to initially think about growth next year. You did highlight the point that base business organic growth has been 26% -- where organic growth has been 20% over the last 5 years, I believe. So at the midpoint, is the 800-point reduction from historical average, is the driver of that what we're talking about? Or are there other factors involved?

I think it's a critical driver, Dan, but there are just a lot of question marks, right? And I think as we look forward, I think it's -- the business has really taken off, right? And typically, what we're going to see over time is we're going to see some years over your kind of estimated averages, right, of growth. And you're going to see a couple of years that are under, right, in a 10-year period, 1 to 2 years. So this could potentially be one of those 1 to 2-year periods. And certainly, I certainly feel a little bit like that. So that's really the context that we're coming from. And we want to make sure that we're kind of collectively, as an investor group and as a company, making sure we're giving the right information to investors and to you guys who are covering the stock, and we don't want to get over our skis on this. And there's definitely a lot of unknowns.

Lot of moving parts. I would agree with that. Okay. Let me switch to margins and just ask broadly, what is the Repligen philosophy towards margin expansion? At the Analyst Day, you gave a revenue target for '27, '28, but there was no EBITDA number associated with those revenue levels. So I'd love to just hear your, A, how you think about annual op margin opportunities; and B, if you'd be willing, just what the trajectory might be that accompanies that top line?

I'd love to give you perfect transparency on that, Dan. But listen, here's what we know about margin and our overall philosophy is we definitely believe -- see the importance of expanding margins, right? When you look at our adjusted operating income over the last 3 years before '22, we grew at 1,180 points. So clearly, that's one of the things at the forefront of our minds is that we need to deliver profitable growth and volumes enabled that. As we -- so that's not going to go away for us. But some of the challenges that we're facing right now, right? We're looking at next year, and we're going to see $100 million COVID decline, right? We've already indicated that. We're seeing foreign exchange rates that are really compressing our revenue, and a lot of that flows through the bottom line. Probably 80% of that flows all the way down through the bottom line. We've got a little bit of a natural hedge, but it's not enough to fully cover that, right? So we've got that headwind. We've got capacity investments coming in. And those are -- will obviously have to be paid for. We spent $85 million in CapEx this year. Those are going to hit the P&L's depreciation over time. And so those are coming through. And I think the other thing that we've got showing up as a headwind here in Q4 that we haven't seen previously is our challenge with material costs coming from suppliers. So throughout the year this year, through -- at least through Q2 and partway through Q3, we were burning inventories at prices -- at '21 prices, because we carried that much inventory into the year. So starting in Q4, you're going to see a full quarter of that material cost inflation. That was a bit mismatched with our pricing where we went out to the market and increased prices, and so we saw really high margins in the first two quarters. And so maybe a little bit inflated, but not exactly matched up to the cost coming in, right? And so that's another dynamic. So as we get through Q4, we're going to be able to see exactly where the margins are flowing out. And I don't think they're going to be exceptional, and I think we've reflected that in our overall guidance for the year. And if you look at the implied guidance, you'll see that Q4 came down, and it's consistent with what we've been talking about. The FX component is one that's hitting us at a level that we didn't even -- that we didn't see coming. But who can predict FX rates, right? So those are some of the challenges we have. So I say we wait. Let's look at where Q4 comes out, I think we'll be able to give you a lot better perspective going 2023. But I will say if you look at the full year margins, there will be a drop down in margins next year. I think that's a given. And it seems like what I've read other companies' earnings releases in our space are having similar issues with FX.

But just to be clear, on the COVID revenue step down, there's a volume leverage associated with that you won't have, but there's no mix element within that product set? Or is there?

No, I don't see a major mix element there. It's volume. I mean, as we grew like crazy over the last 3 years, our margins came with it, right? That's a big lever for us because we've got a fairly high fixed cost business, and so volume is a big play. But I don't see a significant mix challenge that we have.

Okay. How about CapEx going forward? You're right, this is a pretty significant year as far as CapEx goes. Is that to be followed down the line with some additional build-out, or?

Yes. So we've got some projects that we need to finish in the fluid management side on the assembly side. And I know there's other miscellaneous projects going, so I think next year is going to drop down a little bit. We're spending $85 million this year. Next year will drop down a little bit. And then after that, I think it will drop down to even a lower level, yes. But we've got some investments to make next year. We're going to finalize the budget, and we'll give you a little more specific guidance on that, but it should come down. And we're going to have to be disciplined about making decisions on CapEx, also on operating expenses here next year as things aren't shaping up, but it's going to be a great revenue year. When you've got a -- you got $100 million COVID decline out of the gate, and you probably got $25 million to $30 million FX impact right out of the gate. So it's going to be tough to drive significant margin improvement so we have to be disciplined about investments.

So have you been able to make -- on the op expense side, have you been able to make a lot of the hires and just spend the money that you've needed to spend this year in anticipation of not having to be well above average, I suppose, next year? In other words, is there flexibility in the model that allows you deliver as well?

There is, there is flexibility there. I mean, some of the things that we want to do but don't have to do, we won't do it next year. But we're not going to fall hard either, right? We've got the appropriate infrastructure, resources, selling resources in place to get through next year.

Okay. Maybe one more for you, and then I'll let you go. On M&A, you guys have done a really nice job of finding small assets, several of which most people generally don't know about until they read the press release or listen to you talk about them. Do you still see there being a good market out there for those types of assets that can move the needle and are also just technology adds and then the financial profile adds?

Yes. So I would say the deal flow coming from bankers this year has been a bit lighter than what we had seen in the past. I think part of that is probably driven by the markets being a bit softer than maybe what they had been in previous years. And so people that own these companies are not -- well they're not really signed up for the fact that their company might be worth 30% or 40% or 50% less, like a lot of the companies on the market, stock market, but they haven't really signed up for that. So I think a lot of those companies are sitting on the sideline waiting for potentially better time to engage. And I think they will engage if you approach them. But to go off for a public, bigger auction, I think they're kind of waiting on the sideline. With that said though, absolutely M&A is an important part of our strategy. It's been great. I mean, a lot of what we've done over the years in terms of growing the business organically is taking these products that we've acquired, expanding on them through our internal R&D efforts, and bring out better products to the market, single-use products where they're stainless before and driven growth. So it's still going to be a really, really overall important part of our strategy. And I think while you haven't seen us do a deal this year, I would still expect us to do at least a deal or two every year as we go forward like we have in the past. But -- and you could almost consider Daylight Solutions a deal -- it's generally a partnership, but actually acquiring technology to take the market is kind of the equivalent of the deal. So we haven't intentionally slowed down. It's just a little less -- a little less to choose for them out there right now, and we continue to be selective, right? We're going to focus on products that we think can take industry-leading positions. We're going to leave the commodities to others to take.

It's probably a smart move. Okay. That will probably do it for us on time. So Jon, I do want to thank you for being here. Have a great Thanksgiving.