Repligen Corporation (RGEN) Earnings Call Transcript & Summary

All right. Good afternoon, everyone, and thanks for joining us for the Repligen management presentation. My name is Matt Larew, I cover tools here at Blair. Pleased to be joined by Tony Hunt, who is the CEO of Repligen; and Steven from IR is here as well. Just quickly before we get to the presentation, first, the breakout session is upstairs in [ Jennie ] A. Second, for a complete list of research disclosures or potential conflicts of interest, please visit williamblair.com. So again, very pleased to have Repligen here. And Tony, I will turn it over to you.

Great. Thanks, Matt, and good to be here. Looking at a lot of familiar faces in the audience here. So hopefully, I'll add some new stuff in so that you guys don't give me a hard time in about 45 minutes when we get to the Q&A. But look, great to be here. I'll just kick off. So I think you guys all know that one of the things that we've been able to do as a company over the last, I would say, 5 to 10 years has really established ourselves as the innovation leader in bioprocessing. And we've done that by really focusing on developing single-use technologies that drive efficiency gains for our customers that improve yield, improve productivity. And that's what differentiates Repligen versus many of the other players in our space. Now last year, as everybody knows, was a challenging year for the industry. And tongue-in-cheek it's not -- it's still a challenging year in 2024, but I think we're seeing more green shoots, especially through the first 3, 4 months of the year than what we saw in 2023. But for us, last year was all about destocking. It was all about slowdown in the first half of the year in pharma. Obviously, China started to go south a little bit in the second half of the year. And as we moved into in 2024, we definitely saw a pickup in pharma, and I think that's maintained through the first quarter. CDMOs are still a little bit of a -- still a work in progress. I think the large CDMOs are doing quite well. I think the Tier 2, Tier 3 CDMOs are still struggling a little bit with biotech funding. Now I know biotech funding is coming back. But I think there's a bit of a lag phase between the dollars flowing in and us seeing it play out in the Tier 2, Tier 3 players with respect to the activities they are doing. So last year, for us, $639 million year. We've grown on average without COVID at about 21% on average over the last 5 years. Our strategy has always been around finding the right companies that we can acquire and investing in R&D and bringing out disruptive technologies. And I think we've successfully done that. I think we've done 12 deals since 2016. We've created these four franchises that, obviously, we're spending a lot of time driving growth for. And then in terms of R&D disruptive technologies, on average, we're launching about 10 products a year. I'd say, over the last 7 or 8 years, there's about 12 products that I would say are truly disruptive. And that's what keeps -- that's what differentiates us in the marketplace. And when we think about our competition, instead of worrying about who our competitors are, we're more worried about getting the right products in the market that can really drive efficiency for our customers. And then the final part for Repligen that also differentiates us is if you look at our customer profile, 65% of our customers are using our products in clinical trials and 35% are using our products in commercial. It's really flipped the other way when you look at the other players in the industry. Most of the other players are probably in that 70% to 80% of revenue coming from commercial drugs. So we have a long runway. And it means as you go from Phase II to Phase III to commercial, you get a multiplier effect in terms of the consumables that are required. So that's one of the reasons why we believe we can grow above market on a go-forward basis. So one of the things that I get asked a lot is what makes Repligen unique, what differentiates us. And if you went back 5, 10 years ago, we would talk about products in upstream and talk about products in downstream, but we've really filled out the portfolio. We have advanced analytics, and we're probably the market leader now in terms of advanced analytics single-use systems. We've made a big effort and push over the last 3 years to build out our systems portfolio. We've built out Fluid Management during COVID by doing 4 or 5 deals. And then if you look at the new modality space, it's become about 20% of Repligen revenue here in the first quarter of 2024. So we've made some big strides where we try to be first to market when it comes to new technology. We want to be the innovation leader, as I said a few minutes ago. Our customers see us as flexible and nimble and with our goal of driving kind of custom solutions for our customers. And that's what gives us the focus on things like process intensification and ultimately giving customers yield improvement or efficiency gains. Now in terms of -- I get asked a lot of questions about where was Repligen before COVID because everybody kind of gets caught up in the COVID piece. And so when you go back to 2019, we were $270 million in revenue with four franchises. And when you get to the end of 2023, it's about $639 million. Now if you take out $32 million out of that, it should be about $607 million. So $607 million is non-COVID. And so you can see even through the COVID years, we've done quite well. We've grown. We've grown through a combination of having the right products, being able to do the right M&A deals and still continue to bring disruptive technologies to market. And you can see our biggest franchise, which is Filtration has grown quite dramatically from $120 million up to almost $350 million in that time frame. So what keeps us, I think, in growth mode is having this really differentiated portfolio of products. Now that's how that translates into addressable markets. Our addressable market -- if we look at the total bioprocessing market, we see it at about $20 billion, $12 billion of that is our addressable market. And if you look at each of the four franchises, you'll see that our market share is still relatively small in the grand scheme of things. So like Filtration is our biggest franchise, but we have a 5% market share in a very big market but we've been able to grow at, on average, at about 25% over the last 3 years. Chromatography is our second biggest franchise, but we have about 14% share and again, growing north of 20%. And then Analytics and Proteins are smaller franchises, but you can see the growth rate in Analytics, again, has been quite nice at about 20%. And our proteins and resins business over the last few years has grown around 7% on average. Now for those who follow us pretty carefully, you will know that this year is a particularly challenging year for us in proteins. It will be down about 35%, and that's simply because we have Cytiva going away which has been on the cards really for the last 4 or 5 years. Millipore discontinued some products, which has also gave us partial headwind, and then there was excess inventory from Purolite in 2023. So when you look at our 2024 and where we need to finish, probably the biggest headwind that we're facing really is on the protein side. But in general, the other franchises are growing quite nicely this year. And I think you'll see as we go through the year that we're setting ourselves up for a pretty good 2025 given the headwinds that we've all had to deal with will be gone. So COVID will be gone, and our proteins issue will be gone and we'll obviously be at a different stabilizing point in China. So what's been our blueprint for success? Many of you have seen this slide before, but for me, what's important is it's the combination of strategic M&A. So it's always about trying to find the right technology company that's out there that we think can differentiate us in the marketplace or strengthen one of the businesses that we have today. The R&D side is around innovation. So while you will see us launch derivative products, I think what's -- for me, what I really focused on is how do you get out disruptive products into the marketplace. And I think this week is a good example of that. So we have a partnership with Purolite, and it's pretty clear with Cytiva going away that our big bet in the Protein A monoclonal antibody space is to partner up with Purolite. We've been doing that since 2018. We just launched earlier this week, the first kind of a best-in-class Protein A resin, the ligand was developed by us. And it gives very high caustic stability, very high capacity, but also very high protease activity resistance. So one of the things that's happening in our industry is as the drug concentration or the titers go up in the bioreactors, you see more and more protease activity. And so the need for protease-resistant protein A, resins becomes more and more important. So this is going to be a really important product launch, and it shows that the combination of Repligen and Purolite is really taking the high ground in the industry. We're the technology leader now in ligand and resin development, not Cytiva. So that is a big change in the marketplace, and that's going to play out over the next 5 years with the ability for us to take a lot more share in this marketplace. So I think that's very important, just a good example of how we think about R&D. And then on the commercial and operational excellence, the big change we've made over the last 18 months is we've expanded our commercial organization to include a key account team because one of the challenges you see when you're a smaller company is you tend to sell in at a certain level into these accounts. And the decision-makers that are at a much higher level at the CEO, senior VP level, don't really get a full appreciation for everything that Repligen brings to the table. So for 2 years, we've been really focused on expanding the commercial org, especially for key accounts. We've done that over the last 12 months, and it's definitely beginning to pay off. On the margin side, there's a real obvious focus after the $200 million of COVID revenue goes away, which is very high margin, that has changed the margin profile for Repligen. So we have to drive volume on the top end, but we've also been a lot more prudent in terms of our spend and our expense control. So gross margin, operating margins, a lot of focus in the company in terms of improving that as we go through this year. So I'll just spend a couple of minutes on M&A. So one of the things that I set up, probably 8 or 9 years ago was really having like 5 or 6 key objectives for every deal that we do. And we really start -- when we look at targets, it has to have some differentiation from a technology point of view. We do not want to go and acquire a lot of companies that are commodity because we don't think that that's where Repligen -- that's not where our strengths are. That's not where we should be playing. So it should strengthen the market position that we already have or expand us into a new area. Typically, the companies we look at are underinvested. They're either underinvested in the commercial side or they are underinvested on the operations side. We look for attractive margins and accretive within a year. So if you look at the deals that we've done, you can see how we've built out the company. We did four deals that have really built out the Filtration franchise. And that's between Refine in 2014 to TangenX in 2016. Polymem, I think, was 2021, and Spectrum was in 2017. So those four deals have given us this $300 million-plus franchise. And what it does for us now is we're the market leader in process intensification, especially upstream, and it comes from having this right portfolio of products. When we look at our systems, systems are being dominated by probably three players. It's really Cytiva, Sartorius and Millipore over the last 20 years. And no one really has broken into the system side of bioprocessing but we have. And we've done that through the original Spectrum acquisition, but also through what we've done with ARTeSYN. And when we acquired ARTeSYN, what we saw was just a great technology sort of portfolio of products, but all custom. And so we've standardized the ARTeSYN portfolio, and we are winning in the marketplace in terms of taking share on both the Filtration and the Chromatography side. So why that becomes important is it allows us to create another consumable stream because everything we do on the system side is single use. So all the flow paths, all the consumables associated with those systems become a recurring consumable and it has allowed us to also start to move into the new modality space. For Chromatography and Analytics, really see technology was a great acquisition for us. It's helped us move into new modalities because there's a real need to measure drug concentration in that space. It's also really helped us on the system side because we now can put advanced analytics into our systems, which gives us a lot more differentiation. And then the last piece is Fluid Management. So this is where individually, you look at this, and there's a lot of commodity components in fluid management. People will look at things like tubing and clamps and say, yes, that's very commoditized. But what we've tried to do is take all these kind of components, whether it's bags, clamps, tubing, but start to integrate it into what we call assemblies, but they're very much tied to our system strategy and to the needs of our customers in and around those unit operations. So that's worked out quite well for us, and we'll expect to see as we go through the next few years, a lot more innovation in this space. So speaking of innovation, last year, we did two deals. One was for Metenova, which is a mixing technology company and the other one was for FlexBiosys, which is a bag company. The reason these became important is we realized that -- for us to be successful in Fluid Management, we needed to have mixing solutions. Metenova gave us a stainless steel mixing solution. We know how to do single-use solution. So we're able to work with Metenova and start to bring the next generation of single-use technologies to market. So on the left-hand side of the slide, you can see MixOne, which is actually a plastic container that has an embedded mixing device. But everything you need to store and transport final drug substance between sites. And it's been a really powerful example of what you can do. We will launch in the second half of this year a whole portfolio of mixing solutions. And the reason we can do that is we acquired a small company called FlexBiosys a year ago. And so what we've done is we've worked with FlexBiosys to make a Repligen portfolio of bags, which got launched at Interphex a couple of months ago. So now we have a proprietary film, proprietary bags going into mixing solutions, and we're going to be a much bigger player in this space. So that's a perfect example of where we've been able to work with the companies we've acquired to develop the next-generation technologies. Some of the other areas where we've advanced our offerings. Last year, we launched our first -- not first, but a large-scale ATF controller, a very modernized versus what we've had in the past. And it's -- we're obviously the market leader, patents have expired in the ATF space. So for us, really, this is about staying ahead, and the way we stay ahead is through innovation. We've done the same thing in flat sheet cassettes. Flat sheet cassettes are typically held together with stainless steel presses. And we are the first company to figure out how to create a flat sheet cassettes without using any torquing or any compression. And so that's what's depicted in the second vertical here, so the self-contained TFDF cassettes. Looks like an OPUS column and very much focused on gene therapy and ADC markets. Third one is the ARTeSYN systems like the cross-flow system here. What we've done is added the advanced analytics. So this is putting flow technology into these chromatography and filtration systems. And then the final one is RS 10. We just launched this at Interphex. This is the first fully automated end-to-end solution for doing UF/DF step, and is in mRNA and gene therapy. So it has incredible low hold-up volumes. And by doing that, it's really addressing one of the big unmet needs in the industry is, which is every drop in gene therapy and every drop in mRNA accounts. And so people do not want to waste product or lose product. So this is a solution that just hit the market and the interest is really high. So kind of a quick summary of everything we've done. I think we've, over the last half dozen years or so, we've really started to transform our industry. We're playing in a lot more places now than we did 5, 10 years ago. So we're the leader now in upstream process intensification with ATF and TFDF. We have created a whole series of single-use chromatography and filtration systems that drive yield improvement for our customers. And now we're adding advanced analytics into that, that gives us further differentiation in the marketplace and allows our customers instead of going to the quality control labs to get results for drug concentration, they can get that in real time on the manufacturing floor. And then the last piece is to expand out our Fluid Management portfolio which you see on the right-hand side of the slide. And by doing that, we're really -- every time we talk to a customer, whether it's about OPUS column or an ATF or it's about systems, we now have a whole Fluid Management solution that goes in and around that unit operation. So you're already talking to the customer, you can expand your share of wallet and address some of the needs that our customers clearly have. So the last section is a little bit on the margins and financials. So from an operational excellence point of view, I mean, the focus in the company over the last 18 months is definitely, it's still very much focused on top line growth, but there's a lot more focus as well on margins, especially as the drop-off from COVID. So in terms of managing variable costs, we have implemented an RPS system at Repligen, looking at things like strategic sourcing, but really trying to drive a lot of cost out of the system. We've definitely done a lot of work on optimizing overhead, looking at how we look at all sites. We've consolidated sites over the last 18 months, and it's all around controlling our costs. And then in terms of OpEx, optimizing our R&D spend, optimizing what we're doing in G&A. And we've made a conscious decision to continue to increase spend on the commercial side because we believe that, that's absolutely the way for us to get through what's been a challenging time in bioprocessing. So I think what I started off by talking about the implementation of the key account team is a perfect example of the investment we've made in commercial. So in terms of business highlights, if you look at last year, like other years at Repligen, we're always focused on trying to get some deals done. So we're able to execute on 2 M&As. Last year, we launched 10 products. Our funnel of opportunities, and you probably heard me talk about this on our earnings call that our 50% and above opportunities increased last year by 50%. So that gives us more opportunities to go out and close. And I think when we talk about green shoots, this is one of the really important green shoots that we see as we've headed into 2024. We're getting about 18% of our revenue now coming from new modalities. And one of the areas where we've had a really important program internally is on greenhouse gas emissions, and we were able to reduce that at all our sites by about 40% in 2023. So first quarter of this year, off to, I think, a steady start, right? We have a target for the first half of the year of $300 million to $310 million in revenue. We came in $151 million in the first quarter. If you look at some of the non-COVID highlights, 2% sequential growth. If you exclude proteins, up 6%. Our order book, I think there was a little bit of disappointment that we were in that 1.0 or higher. We were at 0.99. But if you actually look at it on a 9-month basis, our book-to-bill was about 1.03. We actually think, as we move forward, it's more important to talk about order dollars because for us to hit kind of midpoint of our guidance for 2024, we need about 10% improvement in the order book as we go through the year, and we need about an 8% increase in the second half of the year on revenues. So it's not a massive jump that we have to get to, but we need improvement in the market and increased orders for us to hit the targets. In terms of new product traction, again, 10% of revenue in Q1 coming from new products. Really proud of the fact that we've been able to launch some of the key products in RS 10 and also the disposable bags. And then obviously, cash balance is very healthy. So Jason has done a good job of making sure that there's dollars there as we look at companies to acquire as we go through the next 1 to 2 years. And I'll just leave you with this. I think in terms of focus for 2024, it's really about how do we continue to expand the opportunity funnel. We think it's really important to keep that growing because that's what's going to drive growth in the second half of the year and what's going to drive growth in 2025. We've got to strengthen our presence at key accounts, and that's -- we're doing that through the key account initiatives and bringing on some really strong commercial leaders who can work with us at top 20 accounts. The new modality market is a very important market for us because we feel that we have the right portfolio of products that can drive efficiency and yield improvements for many of these customers. So we continue to focus on that. We have about 25 accounts that are scaling with us that are really driving a lot of the growth. In terms of launching new products, it's all about -- for me anyway, it's about PAT. We think advanced analytics is the way to go. We are the leader in the space in terms of adding advanced analytics into our systems. If we now bring out next-generation mixing solutions, it gives us further traction in the Fluid Management space. And obviously, if we continue to control costs to support the margins and the margin targets we have for the year, that will also help us as we go through 2024 and into 2025. So with that, I'll just stop and I know we'll -- Matt will go to another room for some Q&A. I appreciate everybody joining today. Thank you.

Thanks, guys.