Repligen Corporation (RGEN) Earnings Call Transcript & Summary

Got it. Okay. Excellent. Maybe just shifting gears to margin. Maybe just walk us through key levers of op margin improvement for Repligen. Obviously, we saw during COVID times, volume leverage came through, significant margin improvement then, but where there's expectation to recover back, I'm not sure back to those levels, but maybe just help us understand where we are today and where we can be and the drivers.

Yes. I mean I think the COVID days margin rates, I haven't seen the path yet in the short term, right, to get there. I think those products that we sold had incredibly high margin rates and those were high mix towards that. And I think that we need to think about also the structure of the business has changed since that time, too, right? I mean we've done a lot of acquisitions since 2020, right, in building out our fluid management systems. And so with those acquisitions also come footprint and structure with them. And so certainly, that's a place we'll optimize. So to your question about what our margin levers are, one is how do we find the right optimal footprint, right, continually we talked about site consolidation, is there more that we can do there? Certainly, volume leverage will help, but I think there's leverage you get on your fixed cost structure, which is like real volume leverage fall through. And then there's the other piece, which is we may be operating at a capacity today with people and equipment that could do more than is being done today, right? And you could say, well, why aren't we reducing that structure? And then it's that question of, okay, do I reduce now and then that puts me at risk to grow 6 months, 9 months from now? Or do I have to absorb, if you will, that less than -- it will never be 100%, but lower utilization that you're absorbing now? And I think that that's another key lever for us, but I differentiate that from pure volume leverage. I look at that as the efficiency of being able to do more than with the same amount of resource. And so I think those are going to be the big drivers. I don't -- again, I think the mix of business is something that this year we're very much impacted also with the proteins being down so much, right? That's an above-average margin product line franchise for us. So as that comes back, we'll see some lift. Again, this year, we're operating around a flat price, right, but next year, we think we get back to growing some, maybe it's 1% to 2% price next year. So again, that becomes a volume -- or sorry, a margin lever for us as well. So we're looking at all the pieces. I think that continuing to optimize at the cost of goods sold level and then also the other area then would be our OpEx, right? And we do -- even embedded in our guide for this year, there's going to be a reduction of OpEx through the course of this year that, again, allows us to get some volume leverage both in the year as well as then for next year.

Got it. Okay. I recall Tony's slide where it wasn't too long, it feels like not too long ago when these -- so the capacities were expanding 7 to 9x on each product. Maybe just maybe double quick for us sort of how much do you think and how long do you think it will take us to sort of see this sort of underutilized capacity? And how much of that is sort of driving the margin weakness?

Yes. So I would say there's the -- I'll say, the physical space, right, the footprint, and that's some of that numbers there. I think we feel like we still have a good up to 5 years of runway in terms of physical space. That doesn't mean obviously that we'd have to -- we'd have to purchase certain equipment, right? Certainly, labor resources would go up. So it's not just oh, we can just automatically do more. But from a physical space, I think we still, call it, 3 to 5 years, for sure, runway. And for me, again, it's hard to do the math on, well, how much are you losing because you're not at full capacity? But I'll put it in this context, right? If we kind of keep our fixed cost structure about the same into next year and we get to a double-digit growth, you'll get at least 50 bps of fall through there, maybe more at the gross margin level, so that's the way to think about it, right? How much more can I -- as my volume and sales comes back, how much more leverage can I get on the fixed cost structure that I have? And so that's how I'd kind of quantify it.

Got it. Switching gears to a topic that's maybe on investors' mind today. I mean, just China, I know that's a smaller number for you today. But maybe just any updates on China or China CDMOs? And I mean, one of the peer companies reported last night, and they had them -- obviously, they're expecting even sort of down in China, and they lowered their guide. So just wondering if there are considerations as you look at China, how does it look to you different than end markets as well?

Yes, it's a great question. To your point, it's a good news, bad news because we're going to be at about 5% of our sales is China in '24. So again, good news in that the exposure is limited, but bad news is that, hey, you'd love to see that the other way. But -- and we were 10% 2 years ago, so that's a little bit of the order of magnitude of change. Yes, we are still very cautious on China. I mean, I think if you ask me what are -- we have lots of puts and takes as you go through the year, opportunities and risk. And I put China more in the question mark risk side, right, as we look through the rest of '24. We do see that -- I don't know that we think that it drops significantly more into next year. So it probably becomes more of a neutral sort of driver in '25, right? When we think about '25 growth, it won't be the same order of magnitude of headwind that we've had this year. But right now, we're -- there's still a lot of question marks. You've got BIOSECURE Act. Now there was some positive news there in terms of the grandfathering period, right? It was extended to, I think it was, 8 years from now. I know there's a lot of activity, but just a lot of question marks, right, in that region. And I think that we're very cautious and watching it closely.

Got it. Just rounding out China, there's discussion of stimulus, but then again, how much of that truly ends up in bioprocessing and maybe process development, it's hard to say. So what's your latest...

Same view. It's hard to say what really gets allocated into that to this industry. And then I go one step further is how much of that then in the industry gets steered towards local businesses, local CMO, local labs, right? I mean we've heard that many of those are new and empty, right, or low capacity. And so again, if I'm thinking about the local view of the government there, I'm going to want to incentivize recovery in those local businesses more so than foreign companies selling in. So I think it's still a big question mark for us how it ultimately helps.

I see. Okay. Just circling back on questions around pharma. There was -- BMS had talked about R&D rationalizations, and there are some -- there were already some ongoing cuts at Pfizer. How much does a single large pharma change in R&D or does that -- how much does that impact?

It's -- I mean again, the good news for us is that there's no single customer that has this huge exposure for us from a percentage of our sales. So again, we're well-diversified across the industry and that's helpful. Certainly, we'd love to grow some of those, like I said, the key accounts, of which some of those names you said certainly would fit there and love to grow with them. But again, because of the diversity, as one maybe slows down, we're able to manage some of that overall impact. And again, the R&D cut today, how does that trickle through? Does it really affect this year? Maybe not. Next year, who knows? Right?

That's true.

It's how do you project the impact on that for the future years when it would be coming to us for equipment?

That's right. I want to switch to proteins. I mean, it's expected to be down 30%, 35% this year. How should we be thinking about the pacing and cadence of that? And just maybe tell us what's sort of behind that with Purolite/ Millipore?

Yes, yes, it's great. So again, we talked about proteins being down 30% to 35% for the year, so call it 32-ish at the midpoint. What we've been sharing is think about that as spread kind of evenly across the year, call it, 8 a quarter, if you will, of headwind. And so that will -- we still see that playing out. I mean, you're right. The big drivers there -- it's one is just Cytiva, the in-sourcing that they've done. We had $10 million of sales last year. We'll have very little this year. So that's a [indiscernible] and then we've had some product discontinuations. That's another one that we get to put behind us this year. And then some of our other partners, I think, had -- it's kind of like a mini destocking sort of dynamic in that there was inventory buildup in '23 that they're burning through in '24. And so I think for us, when we look at these, are discrete headwinds in '24 that we're able to put behind us. And then in '25, we see ourselves getting back to good double-digit growth. Purolite, you mentioned, is a really important partner for us. And so they'll certainly be a big part of helping us get to that growth trajectory.

And then you're saying sort of normalized double-digit growth in 2025 for just proteins?

Yes, for proteins, I'm talking about, yes. Yes. I mean again, you put $30 million of headwind both side, it will really help.

Yes. It makes it easier.

Yes. Fair enough.

Okay. I want to switch to M&A. You had Metenova, FlexBiosys. Tell us about sort of integration that's on those deals? And maybe just tell us high-level thinking on M&A at this point and sort of the capital allocation as you're thinking about it.

So yes, I mean, the integrations are going really well. We announced some new single-use bags that came as a part of the FlexBiosys. We got their technology, some of the equipment they had, and we integrated our technology and development in with them, and we just launched again, some new single-use bags. The next step of that will be to take the single-use mixing technology that Metenova has. Again, as you know, they're primarily a repeat business, stainless business, but they had been applying that technology to single use. And so now we can couple that together in those bags we just launched and see that happening in the second half. And so again, back to your question earlier about what are the things that impressed you about Repligen, our ability to integrate product technologies with acquisitions is phenomenal. And the fact that we're launching new products with new acquisitions that are not even 12 months in all, it's pretty amazing and so those continue to go well. M&A remains a priority for us. We've got an active game board, if you will, of opportunities that we're looking at. And again, it's staying in our bioprocessing space, right? And it could be, again, those tuck-in bolt-ins, and we'll continue to look at what else is out there. It's always about the match of what we want and what's available, right? And so a lot of great activity there.

Got it. When you think about, as you said, taking a product in the first 12 months, adding new products into it and maybe building the solutions approach that Tony has talked about too, do you -- does that give you a path for more pricing improvement? Or does it essentially get you sort of more again, product based, so it gets you more volume?

Yes, it's a little of both, right? I think we would say that for the vast majority of our products, we believe they're a value creation. And so the pricing is -- it's the premium that we think is fair, right, to be able to capture for the value creation and less about oh, I'm competing head to head on like with a competitor, right? I think as we build out the fluid management portfolio, that's where, again, as we launch new products, we'll be balancing that, to your point, the volume side, right? How do we get more out in the market and more, I'll say, examples and cases, right, that we can lean on. And so you may take a different pricing approach with that type of product. But again, I think that this year, it's just because there's a lot of question marks, we didn't feel like this was the year to be aggressive on pricing, right and especially after the last couple of years as well, our customers have been taking a lot of inflation, so I think that evolves as we get into next year.

Okay. And in the last minute, I just want to touch on 2 sort of larger areas. One is Alzheimer's drugs. We get this question sort of how is Repligen positioned into that? And what's the potential upside if those were to sort of grow? And then another part of the question is on GLP-1, but that's sort of mixed because there's obviously synthetic production as well as culture-based production there.

Yes. So to your point, we'll start with the GLP-1. So there's 2 ways to manufacture, one's synthetic, one's biologic based. There is no opportunity for Repligen in the synthetic process. When you think about kind of the biologic process, there may be opportunity for us through the Metenova acquisition in filtration, very, very small though. So I wouldn't think that that's a large catalyst for Repligen going forward. In the Alzheimer's, I mean, it's great for the industry. But again, similar to GLP-1s, we're not baking that in as a huge catalyst for Repligen. The sweet spot for us is really in the maps and the new modality of cell and gene therapy mRNA, which encompasses the majority of the new modalities revenue for us.

Got it. Okay. Well, that's all the time we have. This is a great discussion. Thanks for being here.

Yes, great. Thanks everyone.

Thanks.