Repligen Corporation (RGEN) Earnings Call Transcript & Summary

So thanks for joining us this morning. My name is Matt Stanton. I'm on the life science tools and diagnostics team here at Jefferies. Happy to have the team with -- from Repligen back with us at the conference again this year. Some new faces. We have Jason and Olivier join us, Sondra is here as well and Steven. So thanks for joining us today, guys.

Good morning.

Good morning.

I guess maybe one for you, Olivier, to kick it off. You joined the company last fall as President and Chief Commercial Officer, prior experience includes over a decade at Danaher Cytiva, also on the CDMO side at Lonza, both much bigger companies than Repligen. Can you talk a little bit about what attracted you to Repligen? Maybe what you've been surprised since you've joined, what you've learned now that you're on the inside. And I know you've been out on the road a lot meeting with customers across the globe, biopharma, pharma, CDMO, just love to hear kind of what you're hearing about from customers as it relates to Repligen.

Yes. No, good question, Matt. So before I joined Repligen, I knew the company because of its innovation and the breadth of innovation, the number of incredible products that were being launched on the market during the last 5 to 10 years. When I joined, I realized like that was a real fact and that R&D is the real engine for the company. We are capable to indeed bring those breakthrough innovation, but also at a very fast pace, which is very impressive. What I did find out that I probably didn't foresee before I joined the company, the breadth of the portfolio is really nice. I mean before I joined, I knew Repligen for its process intensification capabilities, for its pre-packed column capabilities. But in fact, we've got much more than that, and I'm very excited about it, obviously, being the Chief Commercial Officer because we've got such a breadth of portfolio that it is opening us a lot of doors with key accounts and giving us a lot of opportunities for sure. And maybe the last piece I would mention is,, I like the size of the company. I mean, indeed, as you mentioned, very rightly, I worked mostly for bigger organization. I think we're exactly the right size of company to be agile, and more important than anything else, be very customer-centric, meaning like listening to our customer needs and making sure we will support them well.

Okay. That's helpful. I guess One on book-to-bill, will be the only one on book-to-bill, maybe for both of you, is just simply put as you think about the evolution of book-to-bill and the focus there, why was book-to-bill a good metric over the last year or two in circumstances? And I guess, as we look forward, why might it not be the best metric. And maybe the reason and rationale to shift to orders or other metrics that we had looked at, say, going back pre-COVID.

Yes, Matt, it's a great question. Look, there's always many lenses to look at a business, and some of them are more important to your point at times than others. And so for us, when we look at -- if you go back the second half of 2022 and the first half of '23, that 12-month period, our book-to-bill was 0.85 on average across this. When you look at the last 9 months or the second half of '23, first quarter of '24, 1.03. So for me and the way we're looking at it, it helps to signal that change in trajectory, right? And so that we were absolutely and everybody saw it, right, even though you didn't see it in the sales yet in the end of second quarter, sorry, the end of '22 and then even in the first half of '23, orders were coming down. And so now we've turned that corner, we're back to this level. And so now for us, to your point, it's really just about what orders are we getting to sustain the revenue growth. And in a lot of ways, they can grow consistently. And so the math will be there, right? It will be orders divided by sales. We can always look to it and talk to it, but it's now less of a leading indicator and a change in trajectory and now we're just going to execute our growth plan.

That's helpful. I guess, and going to the long-term growth algorithm, a lot of focus is on the near term. But just taking a step back, Repligen has done a really good job outgrowing the market. I'd love to hear just kind of your thoughts fundamentally? Is there anything that has changed that would -- over the medium term that would cause that kind of growth algorithm to change kind of call it, low double-digit market growth, and Repligen adds a few points on top of that through product innovation, maybe new content and new modalities, any other items you spike out there, but just kind of high level has that long-term growth algorithm changed there?

Yes. No, sure. I mean I really don't see any reason why we shouldn't be able to grow faster than competition here. And I think you picked up already a couple of reasons why. I mean, innovation is absolutely critical. I mean, this is like the DNA of Repligen. And I can guarantee this will stay the DNA of Repligen. We are going to bring like real true innovation that are going to enable our customers to be better. So that's really number one. I would say number 2 is we are still pretty small compared to at least the 4 big guys, and the beauty of being smaller is like, yes, we've got a lot of chances to gain market share across the board. And you heard me saying earlier, we've got a very, very broad portfolio of products right now. One of the initiatives we've taken and that we are just pushing right now quite a lot is to really get much more of these key account managers on the field. We just added 3 more. Now we're covering like 21 big accounts for our companies, and I mean this is going to give us now the chance to just sell much more than only 1 or 2 bits and pieces, we are now starting to have access to the C-suite label, key decision maker, and being able to sell a third or fourth or fifth product. So that's also going to help us a lot, generating that extra growth for sure.

That's helpful. And maybe just picking up on one item. You talked about there on the commercial side, the key account strategy, right, which I think has been a big focus for you. Can you just give us an update on how that strategy has been going. Historically, maybe Repligen has been a bit under indexed to those relative to the other guys. And just kind of any tangible points you can call out in terms of progress both at the larger biopharmas, but maybe also the larger CDMO's as well.

Sure. So in our business, you want to try to escape to procurement as much as possible. And I mean, like many of the business, probably the same. But in our business, in particular, you need to get access to those key decision-makers, which are people in process development, people in manufacturing to a certain extent, people in quality, automation and so on and so on. When you are small, sometimes it's not very easy because the first entry point is always procurement. When you manage to become bigger, you start to slowly, but surely get those entry point that I was just talking about on the different function side. I think the key account management team in place, and we are hiring like very experienced people in the field is just opening source doors at the highest level on all of these functions and this is just enabling us to accelerate our growth like very, very -- in a very tangible manner. So you mentioned both CDMOs and pharma because that's a really great point. In the first wave we were mostly focusing on pharmas. Now the second wave, the 3 people we just added half of the accounts we are going to focus on are going to be CDMOs because we realize that's an area where we need to indeed to get access more to these key decision makers. But this is very successful. I mean I won't give any specific numbers, but the traction we have on those big accounts is absolutely excellent.

That's really helpful. Maybe shifting gears over to cell and gene therapy. You've talked about kind of these 20, 25 customers that are over $1 million each that are really scaling up later stage clinical and also to commercial, how should we think about the durability of this to Repligen? I guess what I'm getting at is maybe not all are successful, but as those move through the later-stage clinic into commercial, it should be pretty durable multiyear growth. Just how do we think about the kind of multiyear opportunity there as those programs continue to scale up, go commercial and hopefully ramp to successful commercial drugs.

Sure. So I like to say we are ahead of competition in terms of serving the cell and gene therapy market. And this is kind of reflected in the amount of sales we do with those businesses, which is very close to 20% of our overall business, which is significantly higher than most of our competitors here. And the reason is because Tony and the Repligen team has been like very visionary like back probably already 5 to 10 years ago that there would be specific needs for those new modalities. And when I say specific needs, it's really across the board. I mean, you don't need the same equipment to manufacture a cell and gene therapy drug as you need to manufacture a few hundred kilogram type of monoclonal antibody products, but you also don't need the same consumable. You don't need the same resin because you need to have very specific features for the products that are being used for those modalities. So not only we've been like visionary like probably 5, 10 years ago, which is why we've got that level of sales, but on top of it, also now, more recently, we are launching products that are just focused on those new modalities. The best example being that RS10 piece of equipment, we just launched a month, 1.5 months ago, which is not replacing anything existing. It's a brand-new offering that didn't exist to enable people really to do their TFF step for anything like cell, gene therapy mRNA because that is the right scale. So we are going to keep on really investing into new products to meet demand that didn't really have a solution so far. The other good example is we acquired a company called Avitide, about 2 years ago or so, which is partly focused on that new modality area as well. And I mean the traction we're getting on that side is also very, very significant right now.

That's helpful. I guess, like you said, a lot of products have got traction. You've got a pretty healthy pipeline. Are there any areas of the Repligen portfolio you think that are underrepresented in cell and gene therapy and maybe have more opportunity to drive adoption there?

Yes, sure. So we merge all new modalities together. So it's not only cell, gene therapy for us. We also have mRNA under the same bucket. And today, if you look at those 18% to 20% of our sales in the new modality, today the majority is in the AV arena. The second biggest is mRNA, then third one is cell therapy. I think we -- if there is one area where we should probably focus a bit more on the cell therapy side, that's probably not our sweet spot in terms of having the right product offering at this stage. Cell therapy on its own is challenging because there are a lot of subsegments on the cell therapy side between autologous, allogeneic, and you call it iPSC that seems to have a lot of traction lately. So it's a market segment that has got so many subsegments that it makes it even more complex than some of the other ones. But that's simply something we need to look at probably a little bit closer, and I would say, both from an equipment and under a consumable point of view as well.

Okay. Maybe one on equipment, a smaller piece of your portfolio, but for you and kind of the broader industries, maybe been a bit of a choppier market than kind of the destocking we see on the consumable side. Olivier, maybe for you, just kind of talk about the pace and slope of the recovery on the equipment side and maybe what gets the equipment side back to kind of normal. Is it just new capacity build? Is there maybe something else out there? And then maybe second part for you, Jason, is just talk a little bit about for Repligen, your equipment book, how kind of the duration of that from order -- orders to revenues kind of how short or long is that process across the portfolio?

Yes. So again, I'm going to use the word segment, subsegment because when you look at the hardware business, you've got quite a lot of different segments. And just to simplify it, I like to call it lab equipment, lab hardware and then more of the manufacturing equipment just to try to simplify it, on the lab equipment side, I don't think we're facing any particular slowdown. There is always some type of seasonality, which is like quarter 1 is always very low, because typically when you're running a lab whether in an academy or whether you're in a pharma company, you get a certain budget for the year. Once November comes, I mean, you just want to make sure you spend your budget because otherwise you're never going to get the same budget the year after. So it's always like quarter 4 is very strong for lab equipment and that quarter 1 is always very low. And so on that side, I would say there is no real pattern that we've seen that could be concerning. But there is indeed like a bit more of a challenging situation, and that's what we quoted during our Q1 earnings call is under the hardware that is used in manufacturing, so what you would typically call the large-scale hardware, whether a chromatography system, whether TFF systems and so on, where we've seen indeed some type of slowdown or disappointment, particularly in quarter 1. Here, again, you have to look at different type of customers. I would say pharma has been like I think more or less a normal pattern in terms of buying equipment. We've not seen so many project delays in quarter 1. We've seen many more on the CDMO side, and we've seen a very weak hardware demand on the small biotech side. Reason being like even though some of the money is finally reaching those people, there is probably going to be about a year of last before they really start to use that money to spend on CapEx, we think.

Yes. And a follow-up too on the timing. So again, it's a similar story, different, it can depend on the equipment. So there could be some of that lab scale that could be a 6-week cycle, right? So again, that's the type of order you can turn around within the same quarter. We might have some of our larger scale systems that could take 3 to 6 months. But again, for us, we're not going to be building this incredibly long, big backlog on equipment, we'll be able to turn through that pretty quickly as well and execute it to sales.

Okay. Great. On Metenova, sounds like progress there has been pretty positive since you closed the deal last fall. You recently introduced a new bag there, I think some other technology to the single-use market ahead of the launch of the mixer in the back half of the year here. Can you just talk a bit more about the launch, how significant this could be? I think this is the first product out of Metenova that you'll plug into the Repligen channel more broadly, which has been successful in the past for M&A deals? And then I think the portfolio there has been more stainless steel. Is it a different customer you're selling to, same customers talk about kind of commercial approach there as well? .

Sure. So the reason why we bought Metenova was not so much for the existing business, but more for the technology we acquired, which is this magnetic mixing system that is very, very unique in the industry. So we need to look at the performance of the business from to two angle. One is really like the business we acquired because obviously we want to make sure that the growth is happening on that side. And so far, the performance has been like absolutely according to our expectations, which as you mentioned, it's all stainless steel mixing equipment for the time being, and this is going via distribution, but via distribution to the same customers we have for the rest of the portfolio. But the main reason why we acquired Metenova was to develop a single-use version of those mixes, which is being like right now, as we talk, worked on in our R&D labs and so on, and we are still aiming for launching those single-use mixes by the end of this year. And that we think is going to be like a fantastic add-on to our overall fleet management portfolio. But we always try to have another vision, which is a step later. And the next step, once we've launched our own mixes with our own bags will be to launch what we call universal bags, which will enable our customers to basically buy their mixing bag from us instead of being fully binded with the supplier they had for mixes. I mean one thing we figure out in the industry is people like got fooled a little bit by suppliers like once they bought their equipment, they were like binded with these guys forever. We think like one of the ways to do business differently is going to be to open the platform to competition so that people realize like they are just not binded to one single supplier forever. That's the role we want to play. I can tell you we get fantastic feedback from the market on that. For the time being now, it's just about executing and making sure we've got that offering probably sometime second half of 2025.

Okay. That's helpful. You touched on it a little bit here, but maybe spend a bit more time on just CDMOs, it's been a bit of an area that's been a little more up and down, maybe a bit of that's just more lumpiness of that business. Would love to just hear kind of your most updated views or thoughts on the CDMO market, maybe how it varies by large versus small, U.S. versus ex-U.S. And I guess, there's some bigger headlines out there in that market, Novo, Catalent, Biosecure. Maybe to the extent those are impacting demand today or kind of how those could shake out over the next few years.

Sure. So it's a really broad topic, so I'll try to be very concise here. First of all, if you look at the very large scale CDMOs, and I'll quote Samsung here, I mean, they are in pretty good shape. I mean why are they in good shape? They're in good shape because they are focused on commercial drugs, 90-plus percent of their sales are on commercial drugs. And as we mentioned several times, that pharma market has kind of recovered more or less completely. So big large-scale CDMOs are definitely enjoying a better situation today. The ones that are struggling more are the ones that are more on the other hand, which is like very early phase type of projects because importantly number of projects coming out of small biotech is still pretty low. But even from some of the pharma company who have been like acquiring a lot of funnel from these small-scale biotech and so on, they also have probably a little bit of a gap on that side. So CDMOs that are more towards the early phase type of project are still having a bit more of a hard time. Then comes the geographical split that you were alluding to, Matt. So China is obviously very difficult right now, not only for CDMO, by the way. It's across the board also for pharma companies. The Biosecure Act I mean that we're all following up very closely. You've seen the latest development that apparently instruction is being given to U.S. company using a Chinese CDMO to get out latest by the end of 2031, which is far away, but close enough that it's generating already quite a lot of noise and so on. But obviously, China is a very difficult market right now. And then on the Catalent topic, obviously, some of the other CDMO's could potentially benefit from that recent acquisition, we are not sure, but it could be that if for whatever reason, Catalent decided to only focus on their own product, some of the Catalent CDMO product would somewhere else, but nobody knows about that. There are a lot of moving pieces. What is common to all of it is the market has not recovered fully yet, and we were still hoping to see some real improvement over the next few quarters.

That's really helpful. And maybe shifting gears over to China. Obviously, still very challenged, like you said, I think, kind of best way to describe it for you in kind of the broader tools group is maybe bouncing along the bottom here. Are there any things you can point to in terms of customer conversation,, funding, maybe even stimulus on the horizon that would make you start to think that '25 could return to growth, also understanding there's very easy comps over there after what we've seen over the last 12-plus months.

Yes. So I'd like to tell you we're optimistic, but unfortunately, I don't think we are that much yet, to be honest with you. and for me there are so many factors that are going against the China market right now, and I just mentioned 3 or 4 of them. I mean -- and maybe some that are a bit newer to you. So the first one is obviously the economical situation of China. So everybody is aware about that, the real estate challenge and so on. So the overall economy in China is under a lot of pressure right now. But the second one, which I think maybe is a bit newer for all of us here, it's like pharma companies themselves in China are suffering a lot because the reimbursement price of drug is like 10% of the reimbursement price of drug here in the U.S. So big products like PD-1 drugs and so on. I mean the reimbursement price is like so low, like most of the big pharma companies in China, the local ones, like the Innovent of this world, they are really suffering right now because they just can't generate profit at this stage. So obviously, this is adding some more pressure into the system because those companies themselves are struggling to be profitable. And then obviously, the next piece is like the more pressure you have when you're a pharma company to be profitable, the more you have to source locally to avoid spending too much money on your equipment, on your consumables. So the share of local company are probably more than doubled before COVID until now, which is why it's even more challenging for some company like the U.S. and European companies to get their market share back here.

Yes, that's helpful. Okay. And then last few minutes, Jason, I'd like to maybe touch on margins a bit on the gross margin side. I think this is an area you've been very focused on. Clearly, Repligen added a lot of capacity over the last few years. We think of kind of pre-COVID margins in the mid-50s. You've guided to 49 to 50, I think, for this year. As we think about a bridge back to that pre-COVID level outside of simply the volume leverage, is there anything else to kind of spike out there in terms of opportunities to drive those gross margins back to pre-COVID levels.

Yes. So you're right, volume leverage is going to be a piece of it, but I'd still break that up. There's the leverage you just get on your fixed cost structure, right, where that stays the same and you're getting more sales out. And then I think the other thing that we'll find is that for the resources that we have, we're going to be able to get more out of that without adding more, right? So I'm going to get some of that efficiency back from a volume piece, the other things is certainly as protein grows, returns to growth again, that's going to help from a mix perspective. Proteins is higher than our company average, and that's down 30% to 35% this year. We've talked about this is a flat price year. We do expect that we'll be able to get back to some level of price growth, 1% to 2%. So that certainly will fall through to the bottom line and help profitability. And then the rest will be good old-fashioned productivity, execution in our manufacturing sites. We'll continue to ensure that we've got the right footprint. And then also just, again, driving, we have a program called our Repligen performance system that, again, just drives productivity at a project level across all of our sites to continue to get more out of what we've got.

And then just one quick one on the pricing. So the flat pricing for '24. Is that kind of the way to think about as net pricing. So maybe you're still taking a little bit of pricing, kind of inflation, there's more normal inflation, and you're taking 1 or 2 net for this year.

And even if you look under the hood, there's going to be some products that are up, some that might be down. We're going to -- we have issued price increases. But again, recognizing there'll be -- our big customers have taken a lot of inflation over the last few years, we know this isn't the right time to keep pushing that maybe as aggressively. We have our key account strategy, which frankly will always be a pressure price as well. But we do expect to get back to kind of normal levels next year.

All right. And with that, we're out of time. Thanks for joining us today. Appreciate it.

Thanks, everyone.