Repligen Corporation (RGEN) Earnings Call Transcript & Summary

All right. Good afternoon. I'm Julia Qin, lead analyst covering life science tools and diagnostics at JPMorgan. And it's my great pleasure to introduce you to our next company presentation by Repligen. With that, let me turn it over to Tony. Welcome.

Great. Thanks, Julia. Delighted to be here. So I look forward to bringing you guys up to speed on all the things going on at Repligen. I thought it might be useful for the first few minutes to give the audience a little overview of where I see the bioprocessing industry as we enter 2023. There's been lots of questions on this. So, I think if you look back over the last 5 years, tremendous growth in bioprocessing, really started mid-2018, and it's been really fueled by increased number of approvals to monoclonal antibodies. There has been a significant investment in cell and gene therapy, which has spawned a whole set of companies that have scaled and started to use bioprocessing equipment, equipment from Repligen. And then obviously, the pandemic hit, and as the pandemic hit, and that just was an extra -- it really accelerated the growth in bioprocessing. And as we -- and that obviously lasted through to 2022. And as we enter 2023, while there is some legitimate concerns about the drop-off in COVID revenue, which is real, and the fact that there are pockets of inventory that have built up at our customer level, the real kind of story entering 2023 is that the markets are incredibly healthy. So, one of the things that I've personally done over the last quarter is, gone out and visited a whole set of customers in Europe and North America, and really just tried to understand exactly what the state of investment was like. And to a person that I spoke to, what I saw and what I heard was, significant scale-up happening, not a lot of money is moving into the cell and gene therapy into mRNA. Biosimilars have been scaled, cell and gene therapy drugs have been scaled, and so, I would propose that the bioprocessing market is incredibly healthy, and there's a couple of quarters of inventory challenges that we have to move through. So what does this mean for Repligen? I think, when you look at Repligen as a company, we've really differentiated ourselves in the marketplace by focusing on innovation. So, we're the true innovation leader now as we enter 2023 in our markets. And we've done that with single-use solutions. We're very focused on yield. We're very focused on improving productivity for our customers. And if you look at what we've accomplished over the last 5 years, we've been able to take the company from about $140 million in revenue in 2017 to $800 million approximately at the end of 2022. We've grown at about 41% CAGR over the last 5 years. If you take COVID out of the equation, it's been really growing at 26%. About 1/3 of our revenue is now coming from new modalities. So you combine what we've done in COVID with what we have in cell and gene therapy, about 30% coming from there. One of the important parts of our strategy is around launching disruptive technologies. And this is how we differentiate ourselves versus some of the big competitors we have in our space. And so, about 10 disruptive products have been launched in my tenure. And when you look at our customer profile, 65% of our customers are in clinical development and 35% of our customers in terms of generating revenue for the company are in commercial. This is ex-COVID. So this compares with the big players in our industry. They're more like 75% to 80% in commercial, and then sort of 25% or so in clinical. This gives us a big runway. And you'll see later in the presentation when I show you some of the data on adoption of some of the technologies. This should be a tailwind for Repligen as we go through the next few years. So, how do we set the company up, right? So if you go back a few years ago to 2017, mentioned the $140 million in revenue, but we were 3 divisions, 3 franchises in the company, filtration, chromatography and proteins, pretty evenly balanced from a revenue perspective. What you can see in the last 5 years is our filtration franchise has really gone from about 35% of our revenue to now a little over 60%. And that's being driven by the disruptive technologies that I spoke about. We brought a lot of products to market in filtration over the last 5 years. It's really differentiated us versus our competitors. And then, if you look at the other franchises, whether it's analytics, chromatography or proteins, all of these product lines are doing incredibly well. And in each of those franchises, we also have highly differentiated products that has set us apart. So, if you want to -- if you think about the $800 million in revenue and you ask the question, how is that split up, right? So, about 75% of our revenue is coming from consumables and 25% is coming from capital equipment. And most of the capital equipment revenue has really come from the fact that we did 2 deals, one for Spectrum back in 2017 and one for ARTeSYN at the end of 2020. That's really helped us balance our portfolio and add a lot more capital equipment into what we do. From a customer perspective, about 80% of our customers are either in biopharm or CDMOs, and the other 17% to 20% are what we call the integrators. And the integrators are other bioprocessing companies that we sell to. And then, from a modality point of view, 70% of our revenue is coming from monoclonal antibodies and 30% is coming from a combination of cell and gene therapy and COVID, which, for the most part, for Repligen, is mRNA. So, where does that leave us when you look at the markets, right? We believe that the markets are incredibly healthy. If you look at the monoclonal antibody market, there's over 140 drugs that have been approved. There's 800 in Phase I through III clinical trials. So, a lot of products still going through the scale-up. And as we have more products in our portfolio, we have more opportunities to be involved in those monoclonal antibodies. When you look at cell and gene therapy, again, very healthy 14 approvals, a better year last year for cell and gene therapy approvals. We expect that the number of approvals is going to continue to go up with 500 trials ongoing, again, a really positive position for anyone in bioprocessing and good for Repligen, given the interaction we have with cell and gene therapy companies. When you look at the mAb piece and you dig down a little bit more and you look at biosimilars, there's about 100 active programs out there in biosimilars today with a lot more biosimilars getting approved in the U.S. So, for example, in 2023, you will see 8 biosimilars for HUMIRA hit the market in the U.S. And there's 4 other blockbuster drugs that are going to come off patent over the next 4 or 5 years that's going to fuel a whole flurry of activity in the biosimilar space. And when we look at where Repligen is, we have way more products today than we had in 2017 when a lot, let's say, the HUMIRA biosimilars were really developed. So we expect that we're going to play a significant role in the development of next set of biosimilars. And the last piece of the puzzle is mRNA. As I said in my intro remarks, I spent a lot of time talking to mRNA customers in Q4, and there's a significant investment happening. If you look at the main players, whether it's Moderna, Pfizer, BioNTech, CureVac, players that were involved in COVID, they've really pivoted to non-COVID programs, whether it's on the vaccine side or it's on cancer. And you've seen over the last 3 or 4 months some very positive results. Moderna working with Merck on a KEYTRUDA combo trial, BioNTech moving forward and expanding their manufacturing. And then, if you have listened to what Sanofi is doing, they're building 2 vaccine centers, 1 in Lyon in France and the other one in Singapore, which again shows that the level of investment that's going on is quite significant, and it's going to be another driver of growth for bioprocessing. So, how does this leave us when you look at the addressable market for bioprocessing? We see bioprocessing as a $23 billion market today. Repligen -- our addressable market is about 1/3 of that at $8.5 billion. And if you look at our franchises, both our filtration and chromatography franchises are all showing about 10% to 12%, 12% to 13% market share. So, plenty of room for us to continue to take share in these markets. And then, the other franchises in proteins and process analytics, we're about 5%, 6%. So, lots of opportunity for us to grow and expand in a market that continues to really grow at a pretty good pace. So, our total -- of our TAM, we're at 9% to 10%. And if you look at the products we have, we think that there's huge room for growth for us over the next 5 years. So, how do we think about -- what have we learned in the last 9 years as we've developed and built the company up? And what can that tell us about where we need to go in the next 5? And so, we see our strategy and our blueprint for success centered in 3 areas. One is around M&A. And our strategy in M&A is always about technology first and find companies that have great technology that are under-invested in some way, and then bringing it back in-house into Repligen and start to invest from an R&D perspective. So when we think about R&D, we want to be first to market, can't be first to market in everything we do. But a lot of what we've been able to accomplish over the last, say, 5-plus years is bring products to market that are highly innovative, highly differentiated. And this gives us a better competitive position. We're not competing with the big 5. We intend to end up competing maybe with one of the big 5 for some of these products. And then, the last part is around operational excellence. A lot of conversation, if you went back and listened to the last couple of JPMorgan presentations, I think the main theme was around capacity and how do you increase capacity and get ahead of the demand curve. Well, the good news is capacity, I think everybody has invested increased capacity. And I think now everybody is looking for commercial organizations to continue to build the order funnel for the companies in our space. And so, commercial is important, and we'll talk a little bit about what our commercial footprint is like. So we'll start with M&A. So, over the last 9 years, we've done 11 M&As. As I said, it's all around technology. If you look at our filtration franchise, we acquired 4 companies generating roughly about $60 million in revenue. And we've been able to take that $60 million of revenue, and that ended up last year at about $505 million. So we've done a really good job of taking companies and really accelerating their growth through the strategies we put in place. For Process Analytics, this was the CTech acquisition in the end of 2019. That's more than doubled in the 3 years that we've owned it. And Fluid Management, which was our strategy during the COVID years, was to build out fluid management. That group of companies franchise is now up about 50% in a very short period of time. So I think, for us, it's not about volume of acquisitions. It's about finding the right technology that is the right fit for Repligen and to the strategies that we have for each of our franchises. So because M&A is an important part of what we do, R&D then plays an even more important role as we're always looking for what do these companies have that we can really build upon. And depicted at the very bottom of this slide, there are 5 examples, 6 examples of products that we see as highly disruptive, whether it's the RS20, which is over on the left-hand side of the slide, which is a dedicated system for cell and gene therapy, which came out of our ARTeSYN acquisition to what we've done with TFDF, which has come out of spectrum to our ATF technology or our FlowVPX technology, which came out of CTech. In each case, it's all about getting to technology leadership. And so, I would say that today, we are the -- not only the technology leader, but the market leader upstream for process intensification. When you go downstream, we're the market leader in prepacked columns. And when you go into the world of analytics, we've really established ourselves as the premier player in advanced analytics. That puts us in a really strong position as we go through the next 4 or 5 years. And while we talk a lot about M&A and we talk about what we're doing in R&D, there's also a lot of work going on in terms of recognizing when we should partner. And 2022 was an important year for us in partnerships. We did 2. One was with a company called Daylight Solutions. They play in the aerospace defense, not a company you typically associate with bioprocessing, but we recognize that they had, done a lot of work in mid-IR and using it to look at second order structure of proteins, which we clearly could see there was a benefit to putting that into bioprocessing. So we signed a 15-year partnership with them, and we're focused on bringing their technology, which is called Culpeo to market and expect to see this in the market this year and then over the next 1 to 2 years, getting integrated into our ARTeSYN systems, which will give us further differentiation in the marketplace. The other partnership that we did in 2022 was Purolite. And this is some company we've worked with very closely for the last 5, 6 years. And so, we extended the agreement we had with them on Protein A ligands out to 2032, but we also expanded the relationship to include ligands coming from our Avitide acquisition from 2021. And so, that allows Purolite now to have a much broader portfolio of ligands that they can put on to their affinity resins and compete quite successfully in a pretty big affinity market. So, these are just 2 examples of the importance of doing partnerships. The last 2 pieces of kind of the strategy is around capacity. $165 million spent over the last couple of years. We've increased capacity on our key product lines anywhere from threefold to ninefold. It gives us best-in-class lead times. It gives us really great business continuity when we talk to our customers. And we essentially have 3 to 5 years of capacity now for us to kind of drive right into our customer base with really short lead times. So, capacity is in good shape. Commercially, we've got about 300 folks in the commercial organization split quite nicely between sales, field service, field customer service and field applications. I think we're in good shape, good balance across the regions and expect to see incremental adds as we go through the next few years. So the real story in the company is about being first to market. We want to set standards. We want to set standards with single-use solutions. And the best way to kind of show this is to look at what we're doing upstream and downstream. So, in the upstream space, we probably have 2 of the best technologies in ATF and TFDF. And we have seen really great results with our customers using these technologies in biomanufacturing processes. So, Samsung has endorsed us in the use of the ATF technology in N-1. They see a 30% reduction in production time. If you look at the work we've done with [ Miguel ], a 30-fold increase in lentivirus vector production rates. So this is incredible results. But when you see this kind of isolated one, examples, what you really want to be asking is, are we really moving the needle? And are our customers really scaling and implementing our technologies and commercial processes? So when you look at ATF and TFDF and you look at the number of late-stage commercial processes and the wins we have, 45%, 46% of the wins are now in late-stage commercial, about 54% are in Phase I, Phase II. And if you look at it by modality, most of this is in mAbs, but we've also built up a very nice customer win rate in cell and gene therapy. So this is in great shape. If you go downstream, our focus has been on systems, right? So, with our ARTeSYN acquisition, we've added in both chromatography and filtration systems that single-use, the enabled PAT technology, highly integrated, automated software, again, highly differentiated. So we were able to take what we had done with ARTeSYN and bring this into the world of cell and gene therapy. And just in Q4 of last year, we launched the first cell and gene therapy system that's fully automated, highly easy-to-use, scalable. And when you're dealing with drugs for every drop counts, this is what our customers need. And so, the reaction has been incredibly positive. So we see this as a big win for us and expect it to be a standard in the industry as we move forward. So what about our downstream portfolio? Where are we in terms of adoption? If you look at OPUS, you can see an incredible growth in OPUS columns over the last 7 or 8 years, and we expect we'll be close to the 2,500, 3,000 columns in 2023. If you look at our flat sheet cassette and hollow fiber portfolio, again, almost 1/3 of the customer wins are now in late-stage commercial, 2/3 in early stage. When you look at it by modality, about 60% is in cell and gene therapy, which shows that we've been able to jump into the newer markets and get established very quickly. But we still have about 1/3 of our revenue and wins coming from the mAb world. So this is an important kind of balancing between the different modalities that are in the marketplace. So, what are we trying to accomplish as a company? I've kind of shown you on the left-hand side of this slide, the individual products like ATF, like OPUS, like flat sheet cassettes, but where are we going with our portfolio and how will we differentiate ourselves in the marketplace. So what we want to do is take these individual product lines and start to integrate them with flow paths and then take those integrated flow paths and put them into our systems and then take our systems and differentiate our systems with analytics. So, the kind of the 2 key things that we need to do over the next couple of years is really focus on our advanced analytics and on our fluid management. So I'll spend the last few minutes just talking through what we're doing here. So, in the world of analytics, we just launched the first real-time process monitoring instrument that allows you to monitor your drug concentration towards the end of the manufacturing process. Nobody else can do this in real-time today. And so, we've got this launched in Q4, which allows the process development scientists to really model how to do this at the benchtop scale. As we go through the next year or so, we will bring the same technology into the larger scale systems. When we come to fluid management, to get into fluid management, we had to go and acquire 4 companies, we did that during the COVID years. And what that has allowed us to do is take tubing and fabrication and liners and clamps and bring it all together and put it into what we call assembly centers. And now, our assembly centers are built, qualified, validated since September of last year, and we now have a $50 million business that we believe will grow to about $200 million over the next 5 years. So that puts us in a great position. And I'll just finish with kind of where we are financially as a company. You saw where we finished in 2021 at $670 million, expect somewhere in the $795 million to $805 million range in 2022. Our margins are holding up in the high 50s. Operating margins are doing well as well, somewhere in the 28.5% to 29.5% range. And with $600 million in cash, I think we're in great position. We've shown that we can grow at a very high growth rate. We kind of have shown that we can increase adjusted EPS fivefold in that same time period. So, I would leave you with kind of the final words on where we are as a company. I think we're incredibly well-positioned for future growth. We're the innovation leader in bioprocessing. We've expanded our addressable market. We have an R&D engine that is bringing out really important disruptive technologies. We've done the capacity expansion that everybody -- that we all needed to do. We've got a great track record in M&A, and I think we've had outstanding financial performance. I think when we've set our target earlier or in the middle of last year in September time frame of $2 billion on our way, we really believe that we can accomplish this goal in the 2027, 2028 time frame. So with that, I'll stop and hand it back to Julia for some questions. Thank you.

Excellent. Thank you for that great overview, Tony. I think we can all agree that bioprocessing is one of the most promising end markets in health care in the long term, and Repligen has definitely consistently been a best-in-class bioprocessing story. But maybe just to get some of the short-term dynamics out of the way for the sake of our audience. One of your peers preannounced 4Q bioprocessing results pretty strong. So, can you maybe give us an update on what kind of trends you saw in 4Q and kind of what's the latest dynamic in terms of those near-term order normalization patterns?

Yes. We definitely haven't announced our Q4 results. But when we did our Q3 call, we called out that our base business, so ex-COVID, would be around 33%, 34% growth. I think we're pretty confident about those numbers. And so, expect that 2022 was a stellar year for the company, and we're really happy with the portfolio, the performance. And obviously, as I said in my prepared remarks that I think we're all dealing with a little bit of -- on the order front, some slowdown in orders due to pockets of inventory that have been built up, but expect that, that's going to work its way through the system over the next couple of quarters. So, we're 2 quarters in. I expect that it will last another couple of quarters and then that should be out of the system.

Great. So looking at the '23 outlook, I know you're not issuing your official guidance yet. But I think Street is currently modeling the high end of your 16% to 20% long-term outlook. So, how are you feeling about that at this point? And any puts and takes you'd like to call out or we should think about?

Yes. So we'll definitely give more guidance when we get to the end of February in terms of where we think 2023 will finish. But in terms of what we said at the Q3 call, which was we gave some guidepost as opposed to guidelines as to where we think we could be in 2023. We think that 15% to 20%, 16% to 20% range at constant currency is probably a good starting point. We obviously need to keep an eye on the FX rates. They've turned a little bit and more positively in the last few weeks. I think that's very encouraging. But in general, I think we really like the portfolio of products that we have and our funnel is strong. And just to supplement that, that 16% to 20%, 15% to 20% is on base business, not total business.

Great. And then, in terms of pricing contribution, it was about 5% of gain that you realized last year. As we look into this year, how do you expect pricing dynamics to evolve? Do you see an opportunity to further step up to offset some of the inflationary pressures?

Yes. I mean, we think we're in a period in bioprocessing now where there is some pricing traction that we can get. So, you're correct. In '22, we're projecting about 5% overall realized price. And in '23, we've already gone out with price increases in December -- at the beginning of December, and we're expecting that we should be able to get another 3% to 4%. So, we think this will be kind of the last significant opportunity for us to go out and grab a reasonable piece of price and remind everybody that, that 3% to 4%, we think we can get this year compares to our historical norm of about 1.5% to 2%. So we're definitely seeing some additional traction there that we can get.

Great. Back to that order normalization, we have 1 or 2 quarters of additional headwind. Where in your portfolio do you see maybe relatively a greater magnitude of that headwind compared to others? Or are we looking at a pretty consistent patterns across the portfolio?

No, I definitely think it's more in the filtration portfolio, because the inventory levels are probably more at COVID accounts and at CDMOs associated with COVID vaccine manufacturing. So, given that most of our COVID revenue came out of filtration, I would say, filtration is probably the one franchise that has more exposure to that.

Got it. And then, looking at margins, I think you previously mentioned that you'll be facing $30 million to $40 million of operating margin headwind from that COVID roll-off. And then, there's also FX inflation, whatnot. So, how should we think about the rate of magnitude? I know you're not giving guidance yet, but relative magnitude of the COGS or CapEx reductions that you're thinking about at this point?

Sure. So what we're experiencing right now and through the fourth quarter is a reduction in the COVID revenues. A big majority of those COVID revenues were filters and consumable products. We're going to be backfilling that with other products, some of it being filters, some of it being OPUS, some of it being systems, et cetera. So, a little bit of a mix play that's going on there here at the end of the year and going into next year with the COVID unwind. We're also seeing some FX exposures that I think everybody in the industry is experiencing right now. A large chunk of that drops through to the bottom line for us. More recently, we're starting to see the FX rates come in a more favorable position and recover with the foreign currency strengthening. So that's a positive sign, but we'll see where that goes by the time we give guidance. And we're also seeing the full impact here in Q4 of the '22 cost inflation on the products that we're buying from vendors. We carried a large amount of inventory into the year. We've been burning that off through the first 2.5 quarters. Now, we're experiencing the '22 pricing of those type of materials in our P&L. So those are hitting us as well. Where we go from here? We project it as an implied gross margin, about 56% at midpoint of our guidance for this year. That's going to be a reasonable starting point for next year. But I want to remind, the benefit of this business, one of the great things about this business, is the ability for us to leverage our margin and our cost profile when we grow. And so, this year, it's going to be a bit softer because of the COVID situation and some inventory destocking situations. But remind everybody, in 2019 through 2021, we were able to grow our gross margin by 310 basis points, and we grew our operating margin in those 3 years by 1,180 basis points. So reinvesting in the business now, positioning ourselves for long-term growth, I want to continue to grow well above market. And if we can continue to do that, then we'll be right back in margin expansion. Hopefully, later next year or later in '23, but definitely in '24 and moving forward, you'll be able to see a significant margin expansion for us over the next few years. And we're well positioned now to really be able to take on volumes and get to that $2 billion target that we have by '27-'28. We have that capacity well in hand with minimal investments for additional volumes that we'll take on. So, we're in a great position to continue our above-market growth, which is a great thing.

Excellent. Now, touching on some of the end market dynamics, I know gene therapy is an area you're very excited about. You previously know that you have about 20 gene therapy accounts that are above $1 million in revenue. So, how many of these are kind of in Phase III and could be looking at our near-term commercial scale-up opportunities? And how should we think about the magnitude as your clients move from Phase III to commercial?

Yes. We're definitely in some Phase III, I don't have the exact numbers, but I think -- I would say that the big thing for cell and gene therapy is more commercial approvals. I think we saw in 2022 finally at least a step-up in the number of approvals, expect that, that's going to continue to go in that direction in 2023. And there are some important drugs up for approval. And as I said, we are definitely in some of the Phase IIIs.

Great. And does the fivefold volume increase a fair number to think about in terms of...