Repligen Corporation (RGEN) Earnings Call Transcript & Summary

All right. Great. So thank you all for attending. I'm Tim Daley. I'm life science tools, diagnostics and pharma services analyst here at Wells Fargo. This is the final presentation for my track with -- for the Wells Fargo 2023 Healthcare Conference. So we are very pleased to be having the Repligen team here. We've got Tony Hunt, CEO.

And a very interesting space, very dynamic, the last few quarters, I guess the last few years. So just really kind of just thinking about everybody is really focused on the inflection point, right? Much more so on the order dollar front. I think you guys have done -- been really helpful so far in helping us understand sequential order cadence on a dollar basis. But just to think about August, this conference, we've been hearing slight improvement in tone around biotech. Nobody is willing to call it back or even say it's back, just green shoots around the edges. Just curious, how is August going? Are you seeing any green shoots around the edges from a higher level? And then we can dive into the geos and stuff like that.

Yes, I would say that where we were when we did our earnings call in August is not too dissimilar to where we are today. In other words, we went into what I would call the second half of the year knowing that pharma had taken a drop back versus what we were probably anticipating back in the May timeframe, and we went into the second half of the year with some, at least, degree of confidence that our opportunity funnel which is what we really monitor very closely. We had seen a 25% increase in Q2 in our 75%-and-above opportunities. So for us, that's the kind of green shoots, right? And our goal is between August and the end of the year that we'd closed out on a lot of those opportunities, and that leads to a improvement in kind of order run rate, which would give us some degree of confidence going into next year that we're going to see improvement in bioprocessing. And we've had a number of meetings over the last week, and I think the way we view 2024 right now is that the first half of 2024 would be stronger than the second half of 2023, and then second half of 2024 stronger than the first half, but obviously a lot stronger than the second half of 2023. And for that to happen, I think it's really around what you said at the very beginning, Tim, which is the orders have to kind of rebound a little bit, right, more than a little bit, but that to be rebound versus what we saw especially in Q2. And we think Q3 is probably the dip, the low, and then we start even from a revenue point of view and start to pull out in Q4.

Okay, all right. So I guess bottom or at least a slight inflection point starting after 3Q, maybe latter half of 3Q and then revenue in 2 quarters or so later? Is that kind of the way to think about it?

Yes.

Okay. And is that -- if we think about the ramp, some companies are, we like to discuss multiyear stack comps. Again, you get into intellectual argument where you're talking about 3-year, 4-year, 5-year geometric arithmetic. But just thinking about a kind of the industry running on a kind of multiyear stack growth rate, should we be thinking about the first half of '24? I know you expect it to be slower than the second half of '24. But is the trend like dipping? Like are we -- is the industry pulling back a bit or are we just facing tough comps?

Yes, it's a great question. And I think one advantage I suppose I have as I've been in the industry for quite a while. And I would say historically, the bioprocessing industry has grown at, on average, 8% to 12% and I can speak from my life tech days. That was pretty much a standard range where you would fall into for bioprocessing. And I would say that the industry is healthier now than it was in the 2008 to 2014 timeframe. If you look at the -- and we talked about this in our August earnings call, if you look at the last 3 years and 5 years base business average growth, not CAGR, our average growth, if you include our guidance as of August for this year, we're up, on average, 22% for our base business on a 3-year basis and on a 5-year basis. And we're growing probably anywhere between 5% and 10%, and we've been closer to 10%-plus above the market growth rate over those -- in that time period. So that would put market growth 12% to 14% is probably the real market growth. We include the market being down 10% this year on base business. So I think that's a pretty reasonable -- I think the 8% to 12% and maybe on the higher end of that range, 10% to 12%, given you've got mRNA, you've got cell and gene therapy, you've got mAbs and some nice blockbuster mAbs coming through. And the fact that vaccines are coming back, which no one really spoke about and biosimilars are still strong, that there's no reason why the market can't grow 10% to 12%, 10% to 14% on average over the next 4 or 5 years and why Repligen, with our portfolio that's highly differentiated versus the competition, can't grow above that rate at some 5 to 10 points above it. So that kind of gets you back to what we've been saying kind of consistently that we think we can be a 20% grower as a company in this market. But clearly not 2023, and I think 2024 is looking more like a recovery year and reminds me kind of 2018. If you remember, 2017 was a bad year for bioprocessing and we grew 8% in the first half of 2018, and then it was 25% in the second half. And my sense is, there's no sharp, like, rebound but it's going to be more of a gradual move up and eventually back into more traditional higher growth levels.

Okay. Yes, that's actually exactly where it's going to go next, so read my mind. But 2017 is kind of at least how we're thinking about the best proxy for today. You had a pipeline that's swelled and then all of a sudden, pulled back pretty drastically, granted different reasons than it was some failures. This time, obviously, a lot of other stuff. But at the same time that you had bioprocess vendors increasing their capacity very quickly, and then you had that kind of supply/demand gap out, if you will. So if we think of that framework that you laid out, this is -- '24 is a recovery year, 2018 was a recovery year, first half is 8%, second half is 25%. Just is that a good framework for us to think about '24 in terms of like the order of magnitude of growth?

Yes, I do. I think that's exactly the right way to look at it. And people forget that when you -- when we went to 2019, right, the momentum really carried over from the second half of 2018. I think we were 25%, I said, in the second half of 2018. We were 29% growth in 2019. And our industry, when it comes back, tends to come back with -- in a good way, right, with a vengeance. So I do expect that we'll see above-average growth as we go through, say, second half of next year and definitely into 2025. There's just too -- there's too many positives in the -- which is a great thing, right, in the industry, right? There's so much scale-up that's being scheduled. And you're seeing some goodness happening even in the cell and gene therapy space. You're seeing a few more drugs getting approved this year. And I think that's going to continue to happen. And mRNA and we'll see how the vaccine side of mRNA plays out over the next couple of years. But there'll be more that's going to get approved in that space. And mAbs are mAbs, and there's lots and lots of mAbs that are out there that are going through development. So we feel pretty -- we feel really bullish about the medium, longer term, and we don't think there's anything that's changed in terms of the competitiveness of our portfolio. And almost everything we're dealing with right now this year is a macro problem.

Okay. No, that's helpful. And just still on that 2018, 2017 timeframe. At that point, we saw, again, that capacity come on, demand back out. We saw some price competition, if you will, obviously, more commoditized products. You guys just, again at that time, it was filtration and you guys had a differentiated filtration portfolio. But are you seeing kind of price headwinds, given all the checks that were [ cut by Breda ] to stand up new consumables, facilities or new capacities?

Yes. The pricing situation, I think, in 2023 is definitely evolving. We set a target for the year of about 5% realized price. I think that's where we're going to come in. I don't think we'll be short of that. I think we're going to come in right around that number. I would say that the price pressure in the second half of the year is stronger than it was in the first half of the year. But it's pockets, right? And our customers had to deal just like we had to deal with inflation over the last 2 or 3 years. I think the expectation is that pricing is going to be relatively flat, and then there'll be probably certain accounts that you're going to have to deal with some price concessions for opportunities. So that's almost situational. But I don't expect next year to have -- I think it's going to be like somewhere between 0% and 1% realized price across the board.

Okay. That's helpful. So even with effectively flat price, we could be looking at -- if we again look at 2018, your mid- to high teens volume?

Truly.

Okay. No, that's very compelling. Okay. And then again, we're hearing some interesting stuff. First, obviously, China has been dominating a lot of conversations this week. If we were to think about China, how is the market evolving more recently? Again, I'm not -- I don't think the anticorruption stuff is kind of spreading into any production-oriented things. It's much more on [indiscernible] instruments. But just curious, are you hearing about that or any thoughts on China?

Yes, the anticorruption stuff, I mean, it's kind of always been, I would say, in everybody's -- back of everybody's mind for the last 10, 15 years. And you kind of put things in place, right, to make sure that, that's not an issue for you as a company. I haven't personally been -- I haven't heard a whole lot about that, at least in our space. I think most of our conversations have been around the fact that where you had a business that was 10% of revenue last year, which would have made $80 million, of which 1/4 of that was really COVID-related, so our base business was $60 million. How do you turn the corner in a market that's being challenged on multiple fronts? So I suppose the anticorruption piece has been -- hasn't been a factor at least in the conversations I've had or anything that I've heard about in China for us. And it's been mainly around the CDMOs being challenged in terms of business, early biotech funding drying up. And therefore, those companies were the ones that were supplying or were doing contracts with the Tier 2 CDMOs. Some layoffs on local Chinese pharma manufacturing as some of the biosimilars haven't been as successful as people wanted. And all of those sort of came together. I suppose the last factor that we've been dealing with is manufacturing in China was start-stop last year and the ordering rate didn't change, right? So a lot of stuff was ordered and inadvertently, you've ended up now in an excess inventory for a different reason versus probably what was going on in North America and Europe. And so all of those kind of come together to leave what's a pretty challenging environment, and we started to see the orders drop off in Q1. And so when we did our May earnings call, while our revenue was outstanding, orders were weak and revenues in Q2 were actually pretty reasonable because we were still burning off the orders that we had come in late last year. And now you're more in a situation where orders equal sales and so we expect the second half of the year to be fairly weak on the revenue side, fairly weak on orders. And the trick is going to be next year. Can you get back to even parity on total revenue for China in 2024 versus 2023?

Okay. So even back to that thing, we're saying price volume, so ex-China, so that means Western markets are even going to be stronger if you kind of do that math, if China is going to be flattish, I guess, in '24?

Yes, flat too. We just have to get back to kind of that par level for 2024, given how strong revenues were in the first 4 or 5 months. I think other players have started to talk about China and the fact that orders dropped off for the other companies in Q2. We've been seeing it since early Q1.

Okay, got it. And then on China, the theme that's been emerging or has obviously been present for a while since a lot of the Biden initiatives and the supply chain challenges. But it seemed to solidify more or be more apparent and more forceful and the company's messaging is the onshoring dynamic in U.S. and Europe away from China. So if we were to think about that, is that growth accretive in the sense of, obviously, you have more exposure in U.S. and Europe. But like is there a redundancy built into the system at that point? What's the conversations you're having with customers in terms of, like you talked about the China CDMO demand slipping a bit? But just more broadly as an industry, offshoring China into the U.S. and Europe, are you seeing that beyond just kind of talk, like real active kind of discussions going on with customers about that?

Yes, if you think about the conversations with customers in China, they want -- they do want flexibility, right? They want to be able to order locally. I think there is a concern that trade wars, especially with the U.S., could put them in a position where they can't get product. So I think they want that. It's almost a dual sourcing concept. So I think the local manufacturers in China will probably have a smaller percent of the pie until such time as there is some macro event that will push the volumes more in their favor. So I do think there's a desire at the Chinese company level. If you take -- look at the big CDMOs and the big pharma companies there, that they want to be buying from the Repligens and Sartorius and Cytiva and Thermos of the world, but they want flexibility as well. So I think the whole concept of local Chinese competition being annoying but not impactful, it's definitely a little bit more than that. But I don't think it's going to get to a point where it's -- the majority of purchasing is going to come from the local providers. So I think there's an opportunity for all the bioprocessing industry, and everybody has their own strategy about how you supply into the region.

Okay. No, that's really helpful. So kind of for China, in China, but maybe not even for China and China as long as you don't have the local brand, you don't have to have -- you could still have the Western nameplate on the front door as long as the facilities in China?

Yes, so I think and that's one thing we do not have manufacturing in China. We do -- we have distribution. We have applications. We have a commercial organization. So that's part of what -- we will definitely look at over the next couple of years.

Okay, great. Okay, so that's really helpful. And then thinking about, you mentioned dual sourcing. Obviously, the supply chain dynamics and capacity gap-out, if you will, due to COVID, Defense Production Act, what have you, really kind of emphasized the risk mitigation practices or how companies maybe doubled down on dual sourcing, be it from multiple vendors or multiple vendors or same vendor, multiple facilities, what have you. You guys had capacity earlier than most. You were able to effectively benefit from that dual sourcing dynamic. And just can you help us understand like the stickiness of that -- of those share gains or those new footprints that you got?

Yes. No, there definitely is a perception out there that Repligen took a lot of share during COVID. And I think maybe the truth is that, we definitely had product lines where we had more capacity than others. Because there was such a push for COVID-related demand, most of the share gain was COVID-related, right, where -- and it wasn't like we were -- it was like the other players just couldn't make it so therefore, we picked up a fair amount of COVID business that others couldn't supply. Did we pick up some additional kind of share gain? Yes, we held onto it. In some cases, yes. In some cases, it's kind of hard to tell because with the dynamics in our market over the last 12 to 18 months, it's kind of hard to look at it and say, well, is that a share gain loss or are we looking at just increased inventory levels and you don't really know. And I think that's honestly where we are. I don't think we picked up a whole lot of business from the other players that was what I would call base business. I think it was mainly COVID. Now that said, like every pharma company that I've spoken to, and I've been -- I've done a lot of pharma meetings and CDMO meetings. They definitely want flexibility in their supply chain. So I think that desire to not get caught where we only get products from company X and then a COVID event happens and they did get caught is something that they're acutely aware of. So there are opportunities for sure to -- on second supplier. Where we're different, I think, is a lot of our products are so differentiated. It's not like you look at our portfolio and you say, "Oh, who makes ATF, right? That we could -- the same product as say, there is some really who makes our analytics products, who makes systems. So I think it's more around -- our conversations are definitely more around the multiple manufacturing that -- so we have dual manufacturing for a lot of our portfolio. There are -- because we have an improving -- improvements in our technology that can give yield, a lot of our conversations around like we can offer you not just dual sourcing, but we can give you something with improved yield or improved efficiency. So that's definitely been part of the strategy. And I think the other part of the strategy is that COVID was an interesting time. Everybody was selling because we're always selling, right? Everybody was selling from their home, right? So not many salespeople in bioprocessing were traveling. The applications work was all being done remotely. Even service was being done remotely. So for the last year-plus, I think a lot more people are out doing face-to-face with customers. We've pivoted a little bit to what I would call top-down selling as well because we have a really great commercial organization, goes in at a certain level. But we haven't really pushed a higher level kind of view of Repligen, and we've been doing that now for over a year and it's made a big difference. I think the general perception is that Repligen is a company that is ATF and OPUS and products that you would have heard about pre-pandemic, but they're probably not as aware of what we've done in fluid management, definitely not as aware of what we've done in advanced analytics and probably not as aware of what we've done in advancing our systems portfolio. So almost everything we've done since like mid-2019, people don't really -- some people know about it, but I think the vast majority of customers aren't aware of the depth of the portfolio. So I see it as a huge opportunity for us because you can then start to influence that decision-maker level in these companies and really start to drive down messaging into the organization. So that's part of the strategy.

Okay. No, that's really interesting. Okay. So we went over kind of the near term. We went over a bit more of '24, maybe past '24 into '25. Just if you were to think about the growth dynamics that we just talked about if we split it by CDMO customers versus pharma versus biotech, any particular group near term kind of below trend or below average or midterm and long term? Is it just -- if we're just...

Below average.

They're all below -- I mean, below the fleet average guidance if you will. What are the expectations?

No. I think the interesting piece will be to see which of those 3 groups come out of this kind of -- if you take the destocking piece first. And I suspect it will be the CDMOs because they started to drop orders back in July of last year, whereas pharma really only started to bring orders down in late Q1 into early Q2. So it was really a Q2 trend. I think the level of stocking at CDMOs was probably higher. Our expectation is by the end of the year, CDMOs are pretty much through whatever inventory levels that they've stocked up on and we should start to see a real uptick in CDMO activity. Pharma, I think, is probably around the same time. It might move into Q1. But in general, we're thinking that as we get to the end of the year, that all those groups begin to kind of emerge out of what we would call the overstocking component. I think the piece we've been trying to deal with right now is this whole conserving cash. And those tend to be like a year type events, right? And I really think that pharma comes back into next year, biotech comes back into next year. And those are just a different spend pattern. And we see it -- we don't see it on consumables as much as we see it on CapEx.

Okay. Yes. If we were to think about the CapEx piece, I guess think of and some of the more chunky things, maybe systems as well. What's the, I guess, the historical, obviously a bit higher growth, given some of the new additions portfolio. But just thinking about the mix of the kind of capital-sensitive versus just pure consumables in the sense of where we are today and...

For Repligen or just the industry?

For you guys.

For us? Yes, I would say we've been traditionally a consumable company. And we really didn't pick up capital equipment until we acquired Spectrum in 2017, and then that capital equipment was very much associated with hollow fibers. I think if you look at the kind of the medium-term, longer-term strategy for Repligen as a company, we really are beginning to rally around and focus on systems as a central part of the strategy, and we're adding to those systems with advanced analytics. And we're adding to those systems with consumables and the consumables can be hollow fiber, filters, flat sheet cassettes, can be OPUS comms. But probably the piece people miss is that it's also the fluid management. So you get those Flow Paths that go with systems. And then when you're connecting unit operations, you also have what we call assemblies or line sets that connect unit operations together. So the ideal situation for us would be a really strong systems portfolio that drives consumables and the fluid management components and then we're starting to link unit operations. So you'll hear us talk a lot more as we go through not only this year but into next year and the year after about owning the upstream part of the workflow as opposed to we're in 1 unit operations because we want to be the premier player in upstream intensification. We definitely want to be the premier player in advanced analytics and systems. So if we execute on those, I think we can continue to grow above market, whatever that market growth rate tends to be, but I like what we have and we've always made M&A part of our strategy, and it will continue to be a part of our strategy as we move forward.

Okay, yes. So just a true kind of razor-razorblade rather than product to product.

Absolutely. And we've never really had the razor part, right? We've had a lot of razorblades but we've never really focused on -- I think the ARTeSYN deal has really put us over the top in terms of getting the kind of the [indiscernible] systems, and now you've got to figure out how you make that cheaper.

Okay. Yes, exactly. A few minutes here. I just want to open it up to the audience if anybody has got any questions. I've got plenty more, so don't worry or don't be shy. No? All right. So I guess thinking here about -- we went through China. We went through the near term. We went through the consumables. But I guess if you would think about the growth of the individual segments, obviously, fluid management's newer. You talked about that being a leading edge. Is there -- within the next 2, 3 years, that kind of growth rate that you were discussing earlier, is there anything -- how should we think about the individual product or segment lines?

Yes. I think there's a few -- I think the key for us is the filtration portfolio coming back because it's such a big part of what we do. I think we're -- I think the fluid management component of our portfolio will -- we're in kind of an inflection point for that portfolio in 2023 because the component side, which is the clamps and the silicone tubing, that's a pretty depressed market this year because customers, who what we call integrators, definitely overstock there. But our assembly part, which is how you take all those components, created Flow Paths out of line sets, assemblies, that's doing quite well. So it's almost like a crossover where we would have been more component-focused or driven for revenue in the past is now flipping over to the assembly-driven. And so that's going to be where the growth trajectory and then the component piece comes back in. So we feel good about that. The filtration portfolio, we have a lot of opportunities that are coming through that are moving into late-stage and commercial. They have to be accelerators for us as we go through the next few years, like a lot of our competitors are at 75% to 80% of their revenue comes from Phase III commercial, 35% is Repligen and so 65% is in that clinical funnel. And as some of those products get commercialized, right, that's going to be a nice accelerator for us as well. So I think it's filtration. I think the other ones to talk about maybe for a minute, proteins next year, like this is our last year of Cytiva revenue. So next year will be -- Cytiva will have pretty much moved away and brought everything in-house, so we'll have about a $10 million type headwind in 2024. We'll have no COVID revenue next year so there's -- so you kind of start next year with $40 million of revenue that we would finish this year, won't be around next year. And then I think our proteins business looks actually quite promising because we have a lot of differentiated ligands that have come out of Avitide that we're working with Purolite. So we expect proteins start to move in a very positive direction from 2024 onwards. And we continue to be very bullish about our analytics business. I think it's done really well in a pretty challenging market environment. And if we can start to integrate that into what we do in filtration and in systems, I think it's an accelerator. So there's a lot of sort of positive, I would say, aspects to why '24, '25, '26 should be good for not only Repligen but for the industry.

Okay. And focusing on fluid, I know you did mention the components, the tubing. That, at least from my work, does seem to be the area where you've seen some of the multi-industrials add a lot of capacity. Talk a lot more, if you look at the slide deck of all these companies, you see this big -- now it's this big on the page. Just curious in your ambitions to kind of sell the full system and with fluid as the kind of chain linking it all together, is there risk of these new players that are kind of probably less margin-sensitive, given it's part of a bigger entity but they are looking for growth to choose that number? Just thinking about that competitive environment and the full system ambitions around fluids.

So I do think they're different and they're different for this reason. One, you're absolutely right, the component side of fluid management is highly competitive, and it's going to be margin, lower margins and price sensitive. When you start to integrate those components, now we -- we're one of the few companies that actually owns the components that go into what we call assemblies and into Flow Paths. So we should be -- we should have a cost structure that's better because we're not buying the components. We actually own all the components that are required or the majority of the components that are required. So I think the growth trajectory for us should be around the systems piece. And most of those companies that you think about that are competing with us on the component side, they don't have a systems portfolio. And the companies that do have a systems portfolio buy the components.

Interesting, okay. It's only one that's fully got it all linked in. Okay. And then last minute here. I just want to touch on margins. Again, just probably should have gotten to this earlier, but how should we be thinking...

I'm happy to answer it in 60 seconds.

The incrementals in '24, there you go.

Yes. I think -- when I look at our margin profile, and we were just saying it in some of the meetings earlier this morning, just like every other bioprocess company, we're going through a kind of a rightsizing of the company. So we've had to lay off some individuals. We're definitely tightening our belts on expenses. And if you think about it, right, in during COVID, we hired so many people to drive that $200 million of business that came from COVID. That doesn't exist anymore, or more or less at the end of the year, it doesn't so we've had to rightsize down. And then the capacity expansions that we made, all the facilities that we've built out, that's probably 400 basis points on the gross margin side. So if you start at like that [ 58 ], that probably brings you down to [ 54 ]. Everything we need to do in the next few years is all volume-driven. We get the volume and the mix right, the margins will come back up.

Okay. So the 400 bps, just to clarify, is the excess capacity headwind effectively?

Yes, it's the depreciation facility costs all associated with what we built out during the COVID.

Okay, perfect.

That's going to come back up and that gives us capacity out until -- for another 4 or 5 years.

Okay, excellent. Perfect. Well, we're right on time. This has been fantastic. Thanks, everybody, for attending. Thank you, Repligen, for being here. And hopefully, you guys have a safe trip home or good meetings with us today, whatever comes first. All right, thank you.

Thanks, guys.