Repligen Corporation (RGEN) Earnings Call Transcript & Summary

All right, folks. Thanks for joining us. Welcome to the Wells Fargo Healthcare Conference. I'm Brandon Couillard. I cover life science tools and diagnostics here at the firm now. Thrilled to have Repligen with us at the conference this year joining us to my left, newly appointed CEO as of Sunday.

Yes, exactly.

Okay. Olivier Loeillot and CFO, Jason Garland. Thank you both for being here.

Thank you.

Olivier, I would love to start with you. As I mentioned, you've been CEO for all of 4 days now, but I've been at the company for about a year. What have you learned over the past year that you've gotten to sort of like get to know the company, you're obviously in a kind of interesting part of the cycle in bioprocessing as well. What surprised you positively and negatively? And where do you kind of see the most exciting opportunities for Repligen at this point?

Yes. Thanks for having us today, Brandon. Indeed, I've been with the company now for 11 months, and I've been in the industry for more than 27, 28 years. Before I joined, I mean, I was looking at Repligen like being the real innovation engine in the industry, I have to say, being with the company now for 10, 11 months, this has been totally confirmed. I mean we are like really fast at developing breakthrough innovation, things that are really making a difference for our customers. So that was really something confirmed. What I did find out that I probably didn't expect to the extent I really found out after a few months is we have a really broad offering very often from the outside recision is being seen like an ETF Opus company. In fact, we have a very broad portfolio of products. And we are going to talk about it. I'm sure later on, that's one of the reasons why having focused on the key account management program is very important for us because we have a very broad offering for the market right now. So exciting times.

I would love to get your perspective on any changes, let's say, that you'd like to implement, be it in terms of how the company deploys capital, how you look at the portfolio. Obviously, there's been some headlines recently. Is Repligen open to, let's say, being more aggressive on the size and scope of capital deployment and the type of acquisitions you might look at to bring into the portfolio?

Yes. No, that's a really good question. I mean I'd like to answer 2 things here. First of all, we are a bigger company today than we were 5, 10 years ago. So we're probably 5, 10 years ago, small bits and pieces of acquisition could make sense and so on. We are now big enough that we can look at bigger fishes. If I might call it this way, but what I think is still very similar today than it was in the past and will be in the future is we are looking at really breakthrough innovation. So we are not willing to just acquire businesses for the sake of acquiring businesses. We are always looking at companies that are going to bring us something very unique. And I'll go even a little bit further than that Brandon, which is we are not only acquiring a company typically for what it has in its portfolio the day we acquire it. We're also acquiring company for what it may bring us considering the rest of the portfolio we have in our hands. And the best example is the last acquisition we made on Metenova in Sweden, which is on the mixing side. I mean, great business. We like it a lot, but it's a stainless steel business. The reason why we acquired is because we know with the knowledge we have on the single-use side, we're going to be able to launch a single-use version of those mixes but based on the maintain of a technology, which is very unique. So we're always looking at breakthrough innovation company that will be complementary to our portfolio, and that will enable us to do stuff that maybe these guys themselves are not doing the day we acquire them.

Maybe just at a high level, where are we in the bioprocess cycle? The recovery has been pushed out a couple of times. You look across the landscape, generally, book-to-bills are moving in a similar direction, but that's not universal. Can you just unpack where big picture where you think we are and where we're headed near term?

Yes. No, sure. I mean I think everybody is well aware about all of the different headwinds the industry has been facing for the last 2 years. starting obviously with COVID phasing out, then continuing with definitely a very high level of inventory and then China headwind and so on. So good news is some of these stuff now will be very much behind everybody is back by the end of this year. COVID, I mean, this year was very limited for most of the actors, particularly for us, for sure. And then destocking, we think is probably mostly behind us. There are still a few pockets of inventory, probably on the component side for single use, but most of the destocking is behind us. And then the only one that I would say is still definitely a topic for us right now is China and for the industry in general but we are all thinking and hoping that by the end of this year, probably China will have gone to the bottom of the curve and that we might start to see at least a flat situation next year, if not the beginning of a rebound here. So you would say that most of the headwinds should be behind us by the end of this year. And then the only other piece I would add here is we all know like it's a different job today to run a pharma company that was 10 years ago. I mean 10 years ago, you were typically running a portfolio of small molecule on one side. then those very nice recombinant protein monoclonal or antibody with a lot of high volume on the other side. Now when you run a pharma company, you have to deal with a huge diversity of modality which makes it more challenging for some of our customers and themselves, they have to adapt to the way to do innovation, R&D and obviously, the bioprocessing company have to adapt also to those new needs coming from the new modalities here.

CDMOs has been a laggard for Repligen started to see some positive green shoots, if you will, in the second quarter. I think you talked about orders being up 20% year-over-year, book-to-bill around 1.4%. You specifically called out, I think Tier 2 CDMOs, how is the complexion of that customer base evolved since the second quarter? And is that a function of increased activity at their level or just a normalization of kind of the inventory dynamic.

Yes. So we think like there was very little inventory topic at small CDMO. And same, by the way, apply for small biotech companies. So the rebound we've seen, which was really very interesting for us kind of showed us that the level of activity as those small CDMOs is starting indeed to pick up significantly, which is very interesting and also very positive from the point of view. We also saw a very nice rebound of business at small biotech at the same time in quarter 2. So it would suggest like the very, the huge improvement we've seen on funding of small biotech in the first quarter of 2024 started to have some effects at both small biotechs and small CDMOs in quarter 2. As you probably all know, funding went down a little bit between quarter 1 and quarter 2 but was still at a much higher level in quarter 2 of 2024 than it was in quarter 2 of 2023. So we hope and we were going to get confirmation in the next couple of quarters that this is a sustainable rebound at both small-scale CDMO, but also at the small biotech side of the business.

We're going to switch to pharma. I mean also positive trends, but continuation, let's say, I think orders biopharma is up 40% year-over-year. Anything that you'd call out in that customer base, large, small, geographically pharma versus biotech?

Yes. No. So as I just mentioned, we had a good rebound of small biotech business as well in quarter 2, particularly in Europe. Quite significantly in U.S. as well. Asia is still small enough that it's probably not so tangible yet, but really in Europe, in particular, with a huge rebound on the small biotech side. So again, probably much better funding across the board for us Pharma has been really a good segment now for several quarters in a row. And we feel like, particularly on the CapEx spending side, the pharma companies are probably back to normal spending. It's still lagging a little bit on the CDMO side for sure.

You touched on China you kind of alluded to maybe bottoming out here. Maybe it's flat, maybe it grows a little bit next year. Is there any structural that's changed in that market given the prolonged weakness? And is your outlook in terms of growth diminished relative to maybe where it was predownturn.

Yes. No, it's a great question, Brandon. I mean I had a chance to opportunity to go to China, like probably more than 25, 30 times in my career, I spent a lot of time on that market. It's a fact that the market condition in China today are very different than they were before COVID. And I would say from at least 2 to 3 angles. The first one is I mean, pharmaceutical company in China is having quite a bit of a hard time lately because reimbursement price of drugs is very low for and because, indeed, the government has kind of changed its focus from being very biosimilar focus to kind of pushing those pharma companies to move towards really true innovation. And I mean, it's not the same job. I mean it's not the same job to develop launch biosimilars or to really have an R&D team that is capable to really generate brand new innovative drugs to the market. So that's probably what I would call the first factor, which is the pharma industry itself in China is facing quite a lot of challenges. The second big bucket, obviously, is like before COVID, I mean, most of the bioprocessing products, whether consumables or equipment were coming from Europe or U.S. then came COVID where there were a lot of shortages of supply. And then a lot of this pharma company in China just couldn't get the product they needed. So when you combine that to the fact that the China government was really willing to push manufacturing a fact that there has been an emergence of a significant amount of local factors in China are slowly but surely gain a lot of market share. But to your question, yes, I guess, a very huge growth we've seen prior to COVID are probably not going to come back immediately. The good news about the China market is -- I mean it's only a fraction of the population that get access to those life-saving drugs. So you know that the market itself is going to grow tremendously over the next 10 to 20 years. But for bioprocessing company, you will need to really adapt your offering. I think the winners are going to be a company who can bring innovation because China is always going to be very interested by innovative products. But if you only come with me to products, it might be a bit more of a challenging market, I would imagine.

So manus did you benefit at all from stimulus in '22 and you expect that to be anything material for the company next year?

I'll tell you honestly, I mean, we've not seen much happening on the stimulus side yet. I mean I think the government itself is still trying to figuring out where to exactly put the money for what type of company? Is it more into the pharma arena? Is it more into the supply area and so on. But at least, we've not seen much yet on our side. we know they have got big plans and they have to do something for sure, but we've not seen much anything yet.

I'd love to dig into the segments. Filtration seems to be the strongest of your franchises. I think orders year-to-date maybe up 20%. Is that a Repligen specific story or an industry one kind of unpack the drivers of that relative strength?

Yes. It's a bit of both, Brandon, because I'm going to pick up 2 of the product line we have in filtration. The first one, which is very unique to Repligen is the ATF product line, which is really that process intensification technology that we are really leading the pack in the industry. And I mean that's very specific to Repligen. I mean we bought that technology several years ago and it's picking up very nicely. I mean you remember probably in quarter 1 we mentioned we managed to get designed into 9 late-phase products and that was like a really great surprise. We got more in between. That's very specific to Repligen. And talking about biosimilars, when you are working on biosimilars, you need better economics and unit process intensification. So this piece, I would say, is very specific to Repligen. And then you look at another part of the portfolio, which is our flat sheet cassette business, what we call TangenX which is definitely more of a market indicator because that's a market where it's more of a commodity filtration market where there are different competitors, and I think everybody is certainly enjoying growth on that side right now.

In chromatography, I think the business overall was maybe down in the quarter, but OPUS was actually up, I think, high single digits year-over-year with Opus being, I think, by far, the biggest component of chrome, can you just help us square that? And what areas of the portfolio are still underperforming, any reason why Chrome shouldn't get directionally that or overall?

Yes. No, absolutely. So where the answer on filtration is very easy on Chrome. I need to start just explaining like the numbers you're seeing or you're hearing a little bit sometimes misleading from the point of view we used to sell a lot of resin alongside our Opus colors, meaning like when a customer was coming to us for a prepacked column business, we would typically procure the rating ourselves and then charge the resin back. We realized like this was not a core of our business because not only it was diluting our margin but on top of it, we thought it was much better to have our customers dealing with procuring the resin themselves so one of the reasons why you might not see a lot of growth now for the last 2 years on that segment specifically, it's because the percentage of resin sales within that chromatography portfolio has dropped like very, very significantly. But if you would look at it really more from a number of columns point of view, I mean, the number of columns we have been delivering to the market keeps on increasing and which is why really overall, the Opus performance, we are extremely happy about this year, and we've got really good line of sight of growth for the future area. And then the last piece I would add is it's not only Opus, as you mentioned rightly, Brandon. I mean we will also have a couple of other businesses. We've got some systems that are being sold for chromatography as well and we've got some ELISA kits as well, which are not very big, but which are also part of the chromatography portfolio here.

Switching gears, maybe over to Fluid Management. Fairly newer segments. I think it was $50 million maybe in '22, you put out a target of maybe $200 million by 2017. A number of acquisitions have gone into that business. Are you fully passed destocking, how is the business performing? What are the key growth drivers we should think about for that segment?

If I would have to pick up among the different portfolio we have, one where the overall market environment has really changed the most over the last few years. It's really on the fleet management side. And I mean if you just look back before COVID, this is single-use market was like already growing very high double digits for probably about 5 years before COVID then COVID came and then it just accelerated everything even further where the growth were already very high and then growth became totally credibly higher. So now if you look from the supply point of view, there was a shortage of products before COVID. So COVID made the situation even worse. Obviously, as you can imagine, everybody said, Hey, we need to add capacity. We need to make sure we're going to be capable to manage that huge market growth and then COVID disappear. So certainly demand drops a lot. And not only because there was no more COVID demand related, but also because people really overstocked particularly on the single-use side because they were struggling to find any type of product, whether bags, whether a component like clams, tubing and you call it. So if there is one business that has been particularly suffering since COVID ended up that is with the fleet management side. And I think that's probably the last one that we really fully recover back to the pockets of inventory that still exists. We know like on the component side, there are still some areas where people bought for probably like 5 to 10 years worth of components. So this might still last for a little while on that side for sure.

Something that I think you, in particular, have been focused on. And there's been a theme over the past year has been our Repligen's key account strategy. Can you talk about the evolution of that, how material it is today and kind of the coverage and scope of customers? And do you think it will be a material growth driver in terms of cross-selling the whole portfolio more so in '25 than kind of Repligen has been successful at in the past.

No, I mean, we are just really excited about the successes we're seeing on that side Brandon. I mean I think it's beyond our expectation to tell you the entire story here. I mean, Tony was very sharp back now probably 2 years ago to kick that off, bringing further leader for the team and then hiring the first 3 key accounts. We started to see results already when I joined a year ago, and then we say we need just to double or more than double the breadth of the team we had. So when I do, we only had 3 key accounts. Now we've got up to 7, we are covering each of these account managers are covering 3 accounts. So we are covering 21 account right now, 17 pharma companies, 4 CDMOs I mean my ambition is to keep on growing that organization because the results we are seeing are absolutely great. I won't share numbers yet because it's still too young, and I want to make sure we've got enough data to really start communicating on that but we are very happy about it. And the reason is simple, Brandon. I mean that's what I was alluding to at the beginning of the session today is that we have a really broader portfolio of products and people think we do and when that's the case, you need to be able to articulate that broad offering to higher-level people, not only the tactical procurement people, but more of the strategic process development head, manufacturing head because they understand that slowly, but surely, you become a company that's really going to be able to help them across their entire workflow. So that's really one of the reasons. The other reason why we are convinced it was critical and we are successful with it is when you're an innovation engine. I mean, innovation is not something pharma are always willing to take risk with very often, this has to be taken at a higher level. And again, C-suite level decision-making is critical, and we've been having so many of these very high level meaning now in the last 12 months that we know this is going to help us a lot.

Your mix of clinical and commercial actually flipped compared to where it is the most peers. So like 2/3 clinical, 1/3 commercial. Given that dynamic, I would just like to get your perspective on what's happening in that clinical piece? Have we gone through from your perspective, the portfolio reset and any color you can share with us on that end of the pipeline.

Yes. No. I mean, obviously, well, first of all, I'd start by saying it's not abnormal that a company of the age of Repligen partially in bioprocessing, which is about 10 years now in bioprocessing, is still having the majority of its sales in clinical trial versus commercial. I mean when I joined what was GE Healthcare licenses in 2010, which was exactly the same situation and now 10, 12 years later, the business is almost 10x bigger, which is slowly but surely you are moving towards more commercial. So first of all, the speed is absolutely normal. Now to answer your question more specifically on what do we see in terms of clinical trials. I mean, first of all, funding of small biotech is obviously very important because these guys are at the beginning of the chain. I mean we all know like a lot of the innovation comes from the small biotech and then one day when the product moves towards Phase II or whatever the product is being acquired by a pharma company. And then all of this is going into CDMOs small-scale CDMOs for the early phase, larger scale CDMO. So it's very important. So the funding improvement this year is going to be helping the entire industry a lot and that's why it's very important, everybody is tracking it to make sure it's going to be sustainable for the next few quarters. And then, yes, the other piece I would just mention on the clinical side is the diversity of the pipeline now is like huge. I mean, and we like that ourselves because I know that for some actors in bioprocessing, they might look at new modalities as a risk because particularly when you were designing into a very large-scale monocular antibody and you see one of these new modality coming, you feel like, what am I going to do with my big maps, we have a bunch of consumable design in disappears tomorrow? For us it's all upside because for the reason I mentioned, we were not like that design in into the early generation of monoclonal antibody. Now in the new modality, we can get designed in anywhere and it's all upside for us. It's all about really for bioprocessing company being able to have the right products for the right segment, in the new modalities and then you're going to be very successful for sure, yes.

Do you want to touch on new modalities. So real bright spot. I think orders were up 40% or so in the second quarter. Is that driven by 1 or 2 or a handful of individual programs? Or is it more broad-based on getting out like Sarepta approval account for all of that or not? And are there any milestones or approvals on the horizon that you point to or you're excited about?

No. What we are very happy about particular new modality business, is we've got more than 20, almost 25 accounts that are above USD 1 million sales per year. So that's great because obviously, any time there is a news like the Sarepta extended approval, everybody is very happy about it. I won't comment whether we are designing into Sarepta because we never comment on a molecule-by-molecule basis, but it's great news for the industry in general. But for us, what we really like is we have a really broad portfolio of customers in the new modalities. So like some of them are going to be successful, and that's going to drag your sales much higher in the future for sure.

Equipment is a relatively small piece of your portfolio, but it has been a laggard. Just curious, have you seen any improvement in equipment appetite and maybe touch on more broadly Repligen's equipment strategy and artisan and some of the other things you try to put together.

Yes. No, sure. I mean, we had a tough quarter 1 like probably most of the actors in the industry with a really nice rebound in quarter 2, partially for the artisting portfolio. And we think the reason is because we've got a very unique offering on that side. You probably all remember we launched a product called RS 10 around April of this year. That's a great example of our Repligen strategy. This is a brand-new segment. There was no small scale GMP TFS offering on the market, and we realize like party for new modalities, people have to build their own system in their own plant because there was no offering. So we said, hey, you know what? We are going to bridge that gap by having an offering. And this is one of the area where we had like very good traction, the best being still to come, obviously. And really for us, the strategy on hardware is we want something differentiating. I mean we don't want to just come with me-too products. And one of the big differentiator for us is going to be enabling our system to have PAT. So all of these technologies that enable to try to grab the information like protein concentration, potentially protein aggregation and making sure like all of our equipment are going to be enabled with PAT features so that like when you bought an iPhone 10 years ago and you didn't know why you would buy a camera on an iPhone. Now you would never think about not having a camera on your iPhone. We think we are going to do the same like people are going to realize have to have this PAT tool in every single equipment they buy, they cannot live without being able to track certain parameters in their manufacturing. So that's really how we want to differentiate ourselves in terms of hardware.

Innovation has been part parcel of kind of Repligen's growth strategy and your ability to outperform the market. One of the products we've always thought noninteresting is TFDF you said that at how that's doing. You've mentioned the RS 10, I think system. You've been pretty excited about uptake of that. In the pipeline it's coming or recently announced, do you think it's most material that investors focus on over the next 12 months.

Yes, absolutely. I mean what I love is we've got innovation across the entire portfolio. So we typically launch anywhere between 6 and 10 new products every year. So you would think like if you look franchise by franchise, there is at least one, if not 2 new product launches every year. If I would pick up maybe one topic knowing we don't have that much time, I mean, I would just mention about the recent acquisition we made, the latest one on Tantti so Tantti is a big company, so a base metric company. We just acquired in Asia, which is going to complement the Avitide acquisition that we made about 4 years ago, 3 to 4 years ago, from the point of view ligand is half of the component of resin. The other half is that these metrics that Tantti acquisition is going to bring us combining the 2 together will now give us the opportunity to really develop and launch resin for those new modalities where we know there is a huge demand because the product existing on the market today are not the right one. We are going to have the first launch coming very soon. And then we feel like there is a lot of excitement from the market already, and we're going to have certainly a lot of products being launched over the next 2 to 3 years here.

I do want to touch on proteins jointly. This segment is absorbing a $32 million headwind from Cytiva this year, plus pure like destocking and some issues with Millipore. So just to make sure, so Cytiva is zeroed out beyond this year. What's the outlook for this business going forward? Is it a double-digit grower? You mentioned Tantti.

No, no, no. Absolutely. I mean, we are -- so pure light is going to come back to us by the end of this year with their forecast for next year. So that's a piece of information we don't have yet. But what we know indeed is the Avitide combination for us will generate a lot of course, opportunities for the next few years for sure. So yes, I think the number you mentioned is definitely very realistic from what point of view, at what point of time will it start double-digit growth. I'm hoping next year already, but if not next year, certainly the year after on the protein side, yes.

Repligen absorbing a number of headwinds this year. Cytiva being one of them. You've got China, protein destocking your guidance, I think, is down 2%. That includes 3 points of M&A. So if we kind of back out all those one-timers, I think you get something like up high single digits. Is that kind of the ballpark we should think about in terms of '25, I think the base business in the second half is actually up low doubles unpacked like, I guess, as the industry seems to be coming out of this down period, on a core basis, you're actually kind of already in that high single, low double-digit range market improves maybe next year is kind of that low double-digit range kind of a fair base case for Repligen in '25?

No, I like the way you phrased it, Brandon, because we have a lot of goodness in the business this year. I mean it's unfortunate we had all of those headwinds because, yes, exactly what you mentioned, I mean, we're going to be already double-digit growth in the second half of this year, low double digit, but double-digit growth. So yes, absolutely, I mean, we feel like for all of these reasons, thinking like indeed, most of the headwinds will be behind us next year, there is no reason to start being more optimistic for the future.

Jason, flip over to you. The EBITDA margins, the company pre-COVID, we're in the 20s. You added a ton of capacity that's been a drag on the P&L for sure. Can you just touch on like what the pathway is back to kind of that 20% to 30% range. And what's like the right level of incremental margins that we should think about assuming a top line scenario like that, that the company can drop in '25?

Yes, great question. And I want to be clear, we see a path to get our EBITDA margin rates back to pre-COVID and it will be a combination of the volume leverage, right? So getting that growth on the base that we've got, managing our operating expenses driving manufacturing productivity and efficiencies in our factory. And then price as well will always be a lift as that gets back to more normal levels. And you've got to offset obviously the inflation that you see every year and the salary increases that you're offsetting. We shared that at the gross margin level, we see probably an average of 100 to 200 basis points of lift each year over the next several years, right, on average. I think we get back to the mid-50s, maybe not as high as that 59, 60 peak pre-COVID. I think that's just the nature of the business mix we have. But then when you go down to that EBITDA margin line, we're going to get on top of that 100 to 200 basis points additional leverage just as we really manage our operating expenses. I mean in the math is simple, right? You grow your operating expense at a rate lower than your sales and that falls through. So that really becomes the equation that we're using to get back to those better EBITDA margins.

Maybe you get back to, let's call it, 30%. Okay. There are public peers that are still 10 points above that in terms of adjusted EBITDA margin. So there's something different about your portfolio that's structurally preclude you from being closer to 40% over time?

Obviously, the scale is a big differential, right, with some of the other peers that you might be referencing I need to really get a better view of kind of the line-by-line P&L view of where things are. EBITDA add backs are different, right, in every so kind of normalizing that through and getting a view. But I think scale is in the product mix as well as the business become the 2 biggest drivers. And so I think for us, it's just if we continue to grow year after year, that will set up a rhythm and a process. And whether we get to that 40% or no, I think, still remains to be seen, but a lot of good strength coming.

Almost out of time, Olivier, I would love to just get your update on the M&A pipeline? Should we continue to expect kind of tuck-in deals at Repligen has been so good at historically? And how are you finding the size of assets and relative valuations right now?

Yes. So I mean, we are looking at a lot of different assets like we've always done in the past. And yes, you're right. I mean, we've been particularly successful on that side, and we were going to keep on doing exactly what we've been doing in the past, which is looking at smaller type of deal with very breakthrough technology. That is a tiny example, but also now looking maybe at potential bigger assets as well. because we're a bigger company ourselves today. So it has to be like bringing something that we don't have today. We are not going to just tuck in something that is not bringing us something totally unique.

Super. Unfortunately, we're out of time. So we'll have to leave it there. Olivier, Jason, thanks so much for being here. You'll have a great day.

Thanks.