Repligen Corporation (RGEN) Earnings Call Transcript & Summary

This is Paul Knight, the analyst at a KeyBanc on the life science industry covering Repligen. It's great to have with us today Jon Snodgres, the CFO; and Tony Hunt, CEO of Repligen. And I think that's it from Repligen, right, Tony?

Yes. Yes. We've got Sondra and Steven here as well, but Jon, myself will probably be doing most of talking.

Okay. I know you may have been on the investor [indiscernible] a little while already this year, but if you want to make a few opening comments about the market, please do. And then we'll have some questions develop.

Yes. Maybe start, Paul, with where Repligen is coming out of 2022 and what we think are maybe things that are investors, everybody is like thinking about 2023, I think we should spend a minute on 2022. I think, in general, it was a great year for the bioprocessing industry and definitely a really, really good year for Repligen. And if I were to kind of highlight what I think are the 5 or 6 things that really stood out for me. One is we've continued on our journey of innovation. We got -- we launched 10 products from R&D last year. Percent of revenue coming from new products that were made in 2021 and obviously, some launched in 2022, it was about 7% of our revenue, so that was very encouraging. And that's obviously core to our strategy, which is all around innovation. We -- our base business, despite everybody's -- everybody asking about COVID, our base business was up, I think, close to 40%, 39% organic for the year, which is just a tremendous growth number coming off a really strong 2021. So I think that speaks to how our products are doing in the marketplace, the traction that we're seeing and bodes well for the medium, long-term future of -- for Repligen and bioprocessing. I think in terms of M&A, we didn't do any M&As last year, but we actually did do 2 strategic deals. One was on daylight. And hopefully, we'll get a chance a little later to chat through PAT. But I think adding another PAT tool into the toolbox was really important for us, and I think that's going to be something that will integrate into our system strategy as we go through the next couple of years. And then obviously, we extended and expanded our relationship with Purolite on the ligand side. And as you know, and you and I have been tending about this for many years now. But the progress we -- the decisions we made in 2018 around pivoting to Repligen on ligands has really paid off. And I think the relationship with Purolite has gone from strength to strength. And we've now expanded that relationship with new ligands that address not only monoclonal antibodies, but also map fragments. So I think that was also important. And then last year was also a year where we -- where we completed all the integrations of the fluid management businesses that we had acquired in 2020 and 2021, and we've really set ourselves up for success over the next few years by putting a dedicated business team together, a dedicated commercial organization. We built out the assembly centers that allow us to leverage the components that we acquired and really start to put that into the flow paths that we're selling with our systems. And then finally, the expansion, everything a year ago would have been around have you got enough capacity? What are you going to expand? When you're going to expand? So we completed 3 key expansions last year. There's a few more this year than we have to do. But for the most part, I think we're in good shape when we look out to 2027, 2028 that we -- by the end of this year, we'll have pretty much all the capacity we need to get us out to that kind of $2 billion target that we've set ourselves for 5 years from now. We'll talk about cell and gene therapy as well, which was also a very good year for us. And then I think to answer your original question, 2023, I think the -- we all know there are some headwinds as we come into the year, right? And it's all been -- most of the conversations being around destocking. We've said that we've seen -- the destocking that we've observed is really being confined to sell to the CDMOs and to the component side of fluid management. And I've spent a fair amount of time out in the -- with customers in Q4 and here again in Q1. And there's a lot of activity. So I think the overall markets are healthy and the activity is high. But there's a bunch of headwinds that has kind of slowed the industry down, especially in the second half of last year. And obviously, we'll see how everybody finishes up in Q1 and talks about that when we get to the end of April. But medium and long term, I think we're very bullish on the industry. It's great to see new modalities coming through. It's great to see the scale up. It's great to see the maturing happening in cell and gene therapy. All of those, I think, are going to be very positive kind of leading indicators for the health of bioprocessing and the success of Repligen. So just a quick intro there.

Tony, when you talk to destocking? I understand the CDMOs in that comment, and the other one you made was destocking around fluid management. What do you mean by that?

So when you think about fluid management, which is what we do. There's a lot of individual components that are sold to what we call integrators, but these are all the other bioprocessing players in the industry. So they're the Cytivas of the world, the Thermos of the world, Sartorius, Avantor, Millipore, et cetera, right? And these components are things like tubing -- like silicon tubing and clamps and pressure sensors and a lot of individual components. And at the very beginning of COVID, everybody stocked up on them, right? Because no one wanted to be short on a relatively inexpensive component. And so there was stocking that happened at the beginning of COVID and throughout COVID, that has created this situation where there is an oversupply of these components in the marketplace right now.

Yes. And your prediction on it subsides during the first half of the year or whatever, July 1, 2023?

Yes. No. I think most of the destocking that we've talked about at the CDMO level, we see that as our first half, second half. Like as we get into the second half, that begins to really clear out. I think the components in, I said it on our earnings call a few weeks ago, we think that, that's probably later in the year because I just think there's a lot of components that are just stocked. And this is not Repligen per se, this is just all those components. Like we've done it, and I think everybody else in our industry has stocked up on components, that's probably closer to Q4 time frame.

Got it. And then you had mentioned on the business team at being assembled for the fluid management strategy, you're referring to what ARTeSYN and what else in that kind of discussion?

Yes. So we created this fluid management business internally here at Repligen, and it really consists of a majority of poor acquisitions, right? So ARTeSYN -- those 2 parts to the ARTeSYN deal. One was systems and the other was components. And so these are valves and the associated liners with those valves that are single use. So whether it's pinch valves or diaphragm valves or steam through valves, all of those valves are part of the component side of fluid management. And that represented when we acquired ARTeSYN about half of their revenues. And then the others are really EMT, which was the silicon manufacturing company that we acquired that does overmolding, that's EMT. NMS is the plastic fabrication company that does not only plastic fabrication, but bottle top assembly. So all of that falls into fluid management. And then BioFlex, which is the [clamps] company that we acquired. And again, all of those components go into fluid management. And they go into fluid management in 2 ways. One is the component side where you sell to what we call the integrators, which are the Thermos of the world, the Cytivas of the world. And then the other part is we take those components and we integrate them into our flow paths and our assemblies that we sell to the pharma biotech CDMO end users. So the excess capacity is on the component side of the equation, not on the flow path side of the equation.

Okay. Got it. Purolite, could you talk to Purolite? When was the deal originally going to expire? And what is it now?

Yes. So originally -- and Jon will correct me here, I believe it was around 2026. And we've extended the agreement out to 2032.

2032, yes.

And the reason, honestly was, as we chatted to Ecolab, right, which is now the parent company or Purolite, there was really general alignment between the 2 groups that the progress we've made since 2018 has been really positive, and we kind of all wanted to commit to each other that we were going to continue in the relationship beyond 2026. So putting the 2032 data out there was essentially a 10-year from -- when we did the deal -- when we signed the extension last year. So going from 2022 to 2032. On top of that, we felt that -- when we look at our sales force and of course, we're selling chromatography resins through the ligands and resins that have been manufactured coming out of Avitide and we use the Purolite-based speed in our resin manufacturing, which is just -- is a very positive relationship that we have there. But we felt that Purolite had the channel into the monoclonal antibody side of the market, and we didn't really need to be in there competing. And so we've taken any of the ligands that we've manufactured and developed through Avitide and now we've made that available to Purolite. So it now addresses not just monoclonal antibodies, but mAb fragments, bispecifics, anything that is an antibody or an antibody fragment that's going to be where we play the provider role of the ligands and then other markets like AV, anything in cell and gene therapy new modalities, we would sell direct because we feel that we have a good channel through our sales force through all the work we've done in cell and gene therapy over the last few years. So that's kind of how it splits up. And I think it's a good deal for both companies.

Is it similar to the GE relationship you used to have with some of the business?

Yes. I mean I think there's always different ways to view that. And I would say, Repligen has had a great relationship with GE for 30-plus years, and we continue to manufacture ligands for GE. I think the difference is that GE, they're their own innovators, right? They've created and developed their own ligands. And think about Repligen, GE relationship, more as we were the CDMO for the manufacturing of GE ligands. We didn't own it. We're -- but we were very happy to manufacture it. And I think we've delivered products always on time to the level we've scaled up. So it's been a very positive kind of relationship over the years. I mean, we don't -- the fact that Cytiva GE decided to bring ligand manufacturing in-house, that's absolutely their decision. It's their ligands and how they want to do it is completely up to them. I think what we've done over the last 5 years is just created an environment where we could remain independent on ligands. In other words, we own the ligands that are getting manufactured and therefore, we don't put ourselves in a situation 5 years from now, 10 years from now, 20 years from now, where you've worked very, very hard to create a really strong partnership, but then it can unravel, unwind because one partner decides they want to bring stuff in-house. In this case, with Purolite, the difference is we are the developers of the ligands, we have the IP on the ligands, we manufacture the ligands. So it's very clean and clear what we do. It's very clean and clear of what Purolite does. And I think -- that would be the big difference in the relationships is that it's really our IP, our technology and then working with great IP and great technology from Purolite to provide the resin and do all the mobilization and the selling. So it's just a different partnership, but it's based on really who developed and owned the ligand as opposed to being a CDMO.

Then cell and gene therapy, it closed at what percentage of revenue last year, Jon? And then what are the pieces of -- what are the components going into that market?

It's 14% to 15% last year. And I think the biggest revenue streams come from our filtration products in the cell and gene therapy, but we also sell chromatography products there as well. And as Tony mentioned, starting to sell resin -- resins for AAV. And also our process analytics are kind of early stages going there but have additional potential to go in that area.

When you talk filtration, you're talking what, how fiber, flat sheet?

Yes.

Yes. All of the above systems, you name it.

Yes. And I think to what Jon was saying, Paul, I think the big difference for us over the last few years in cell and gene therapy beyond -- we've always been kind of promoting and selling hallow fibers and flat sheets. And if you went back 4 years ago, that's what we would be telling you like it's a flat sheet opportunity. It's a hallow fiber opportunity. What's changed for us over the last few years has been the emergence of our system strategy, right? And so that's helped us a lot to get in at the bench level and start to see it. And then you can -- not only do you get the system, but then now you can go and upsell on flat sheets cassette or hollow fiber, I think, more recently, when we did the CTech deal, like 95%, maybe even 100% of the revenue was coming from -- that was bioprocess revenue was really coming from the mAb world. And they've at least, I wouldn't say pivoted because we still -- I mean, our primary customer for the analytics business, definitely monoclonal antibodies. But the increase in activity at the cell and gene therapy accounts has been really impressive over the last couple of years. And so that's picked up some steam as well. So that's good.

How fast is the cell and gene therapy market growing for you?

Well, last year, I think it was above 50%. I think it was 50%, 55% last year. In general, I think that's a market that's growing 20%, 25%. I think this year, it's going to be a little -- I think the growth rates are going to be lower, just simply because, one, that whole conversation on CDMOs and stocking at CDMOs, it just doesn't impact monoclonal antibody demand. It also impacts anyone on the cell and gene therapy side. So there's a lot of cell and gene therapy customers that go through the CDMO. So we expect that that's going to be just a lower growth rate business in 2023. I can't remember what the final number, we did put it out. What was our cell and gene therapy projection for this year? 20%?

20%.

15% to 20%, Paul. So I think -- I don't think the market has slowed. I think it's just simply that there is some excess inventory out there that's going to get used, and therefore, that's what's going to make it look like a slower year this year. So it's probably -- it was probably a little higher than reality last year, a little lower than what reality. But in general, I think that's a market that's going to continue to grow. I mean, we were really happy to see that when we finished last year, we had well north of 20 customers now that are buying over $1 million a year. As Jon said, 14% to 15% of our revenue coming from cell and gene therapy, a lot of customers scaling. And you've asked me this question many times, what's it going to take for cell and gene therapy to take off even faster than what we've seen? And I think that's just approvals, right? So there's a number of drugs up for approval this year. I think the more approvals that happen, I think the more momentum there is going to be in the marketplace and therefore, just a positive -- a positive market for anyone in bioprocessing to be involved with.

Yes. Got it. Okay. And in terms of some of these different market segments, is monoclonal antibody growth slowed off? Or is it kind of still going along at historical pace, particularly, I guess, if you consider biosimilar?

Yes, I would say it's growing. I think the market is growing at a historical growth rates. I think what's -- totally clouds this year a little bit is just simply the fact that everybody is kind of working off inventory levels of CDMOs. So that makes it appear to be lower growth, but it really hasn't. I think -- as I said, I've been out visiting lots of customers over the last 6 months. And the activity level is really high. The scale-up is happening. So while 2023 might be a more challenging year, I think when we all look back a few years from now, it's going to be like what we were talking about in 2017 or when we were in 2012 talking about 2009. This is just going to be one of those years where it's not going to be as great as everybody wants it to be, but it's kind of just a bump in the road because overall bioprocessing is incredibly healthy.

Yes. Yes. And any thoughts on the world of mRNA?

Yes. It's -- we're big fans freight. We've just like cell and gene therapy, I think the success of COVID vaccines, right, and mRNA COVID vaccines and our involvement in that puts us in a good position because a lot of our products were adopted for the vaccine manufacturing, especially our hollow fiber and flat portfolios. There's been a fair amount of investment happening in mRNA in 2 areas, 1 being continued vaccine development, which could be flu-based vaccines, hybrid flu COVID vaccines, other vaccines that could benefit from an mRNA strategy. So that's kind of one bucket. And then you've got the therapeutic side and a lot of work going in now to cancer therapeutics and using mRNA. And it's not like there's 500 customers out there doing mRNA. There's probably a couple of hundred, but there's probably 10 or so big guys that are putting a lot of money into it and really trying to focus on bringing products through Phase I, Phase II into Phase III. So it's going to take a little while for anyone to sort of see the big benefit outside COVID. But some of the vaccines get approved as we go through this year and some of the therapeutics get moved through from Phase II into Phase III, they're all going to be very positive. And I see mRNA as being an important market for bioprocessing for the foreseeable future.

Is mRNA more of a filter market like flat sheet, hollow fiber? Or is it -- is it all of the typical biologic process technologies?

Yes. It's definitely a little different than the other biologics in the sense that you're synthesizing on the upfront side versus using a bioreactor or using fermentor to make your drug out of cells. So it's obviously mRNA, synthesis is different. But once you get downstream into the processing part, it's not -- it's not that different, right? You've got affinity chromatography just like you have in monoclonal antibodies. Scale is different, for sure, it's smaller scale. But you've got affinity chromatography, you've got the ability to use hollow fibers and flat sheet. But I think all fibers are probably more prevalent than flat sheet doesn't -- but both are there, right? There's no doubt that customers are using both. And then the system side is also important, right? So customers really want the systems to match the scale that they're operating at. So we believe that when you get into clinical manufacturing, the large skid-based systems are going to be too big, and therefore, you need something smaller. So you've seen us talk about RS 20 and even smaller systems in RS 20 that are GMP with the right software. So we think that, that's definitely the right tack and we expect that that's going to be an important part of our overall solution to mRNA customers.

I'm going to rehash a question a little bit from one of the investors. And that is, Tony, in the past, you had a TTF CTech truly step-up technologies in the market. Is there still room for that in the years ahead? Or will it have to be -- I've got a better system, I've got a new sales force. I guess the question really is how much is the pace of new products going to change the future?

For Repligen or just bioprocessing?

Repligen.

Yes. I think there's no doubt that the acquisitions we've done over the last 9 years has changed how we do R&D. And if you went back to 2018, 2019 and you asked how many products did you launch in 2018 or 2019? My guess is it was a few. Maybe it was 2, maybe it's 3. Now here we are, 2022, 2023, and we're launching on average 10 to 12 products a year. So there's more products coming out. I think it's really encouraging that last year, products launched in 2021 and the little bit of revenue we got from 2022 launches, it was about 7% of our revenue. So that's -- and we expect that will double this year, be close to 14% when we take '21, '22 and whatever revenue we get from '23 product launches. So definitely, that's going to be a key part of our future. But I don't think that M&A is going to become [indiscernible], right? I really feel that there's still things that we need to buy. It's a big market. We don't play in the whole market. I think as long as we stay disciplined on trying to find technologies that fill a gap, our companies that fill a gap in our portfolio or allow us to do something we've never been able to do before, then they're good deals for us to do. And -- so I think we'll continue to do M&A and probably no different than what we've done over the last 9, 10 years. I think got 10 years from now, I think it will average a deal a year. Some years like 2020 and 2021 where we did 3 deals in each year. That's probably not the norm, but I think a deal a year is probably kind of -- should be average for us. And some years, it will be more and some years -- like last year, it was done, but it will average out at about a deal a year. And it's all about finding the right technology, Paul. It's not about us trying to find every private bioprocess company that could be a fit with Repligen. We really try to stick to our knitting on what's important when we do an acquisition.

My guess is you know who they are?

We have a few. Yes, we have a few names that we like. But yes, it's a competitive market out there. So everybody -- my list is no different than probably some of the other players in our industries list as well. So you just have to form some relationships. And when there's an opportunity, you kind of have to move pretty quickly.

And that's a good setup for Jon. How is your balance sheet looking? And then more specifically, Jon, should we start to assume a little more investment income based on the fourth quarter results?

Yes. Paul, as you've seen, the balance sheet is healthy, over $600 million of cash. Interest income is a positive contributor, started really ticking up in Q4, a little bit in Q3 last year and should be a good contributor to income -- on the kind of other income line below the operating performance. So yes, we should -- and hopefully, that will continue to interest rate continue to stay solid and allow us to continue to obviously pick up income there.

And Tony, kind of to wrap up the conversation, what do you think the industry learned as it went through COVID?

That's a great question. I think there was some real positives that came out of COVID, which was ability for the vast majority of the bioprocess companies and the pharma companies and CDMOs that worked on COVID vaccines to be able to pivot. So -- traditionally, it takes a long time for people to spec in a product or to move forward from Phase I to Phase II to Phase III, but the amount of effort that went in at the industry level to move these vaccines through the clinical trial process was super impressive. I think every bioprocessing company jumped in and pivoted in terms of capacity. I think the -- I think it's hard to say that everybody learned that you shouldn't overstock. But when you're in the situation and products are scarce, it's very hard to not do that. So I think people know what the lesson is, but I also think that every situation is going to be different. And I think it's just going to depend on what's going on. I do think that the other thing that came out of this, which is more of the biotech industry, looking at bioprocessing is, I think they saw that there were more than 4 main players or 5 main players in the industry, right? I think we got our fair share, more than our fair share, I think, of COVID vaccine revenue. And I think there was a general sense that there are other companies that can deliver high-quality products on time, at scale than just the standard players who have been around for a long time. So I think that was -- that was another positive. Jon, if there's anything you want to add?

Yes, I think just the evolution of mRNA. I think it just really expedited that. That's going to pivot from vaccines now into cancer therapeutics and other areas and I feel like, that brought that transition forward probably by a couple of years, not more.

Do you think that it also created a clear awareness that you don't really want to be a bioprocess in-house producer? Or was that already kind of acknowledged by the industry?

Bioprocess in-house producers. So Paul...

Would a developer really want to also make their own biologics? Or was that ever even a question?

I think for the smaller players like us in the industry, that's not something we would consider. But it's interesting that when you look at companies like Thermo, right, they have 2, pretty large CDMOs in their network. I'm sure at the Patheon level, there were -- I don't have all the details, but I'm sure they were involved in manufacturing of either various components or the capacity that they had. But I'm not sure -- I just don't know what people on the bioprocessing or the life science tools space were thinking about whether they would jump in and do that. I don't think they were but that's maybe a question for kind of others to answer. You have to be a really big, big company with a pretty massive manufacturing network that you could absorb and move really quickly and have all the logistics of knowing how to develop and move drugs through clinical trials as opposed to being an CDMO who manufacturers to certain trials. So I think our industry definitely likes being the CDMO part, not sure that the bioprocessing industry wants to jump in and be the biological drug manufacturer from scratch.

Yes. Okay. Super. We really appreciate the time, Tony. We look forward to...

Always good catching up. Thanks for having us.

Take care guys. Thank you.

Thanks, guys.