Repligen Corporation (RGEN) Earnings Call Transcript & Summary

All right. We're live. Welcome, everybody, to the grand finale of the UBS Healthcare Conference. I'm Dan Leonard, the life science tools and diagnostics analyst UBS and we're pleased to be hosting Repligen this morning, Jason Garland, CFO; and Steven Chehames from Investor Relations.

Good morning.

Good morning.

Thank you for being here. So you just reported your third quarter. I thought we'd start off -- I'd start off by asking you to just hit a couple of key highlights from the third quarter results.

Yes. No, absolutely. We're very pleased with the momentum in the quarter results, I think the market is continuing to show positive signs for us as well as just our team's execution within the quarter. I mean, we had revenue up 10%. We had orders up 6%. And then we also shared that, that orders number was about 4% higher than revenue as well. So again, continuing that momentum. When you look at some of the pieces, large pharma continues to really be a strong place for us. So that's been probably one of the earliest I'll say, things getting back to more normal levels and has continued to do so. But then also really encouraging to see CDMO now for the second quarter see strength both at the Tier 1 and Tier 2, right? Because that's when we saw earlier signs of recovery, let's say, 9 months, 12 months ago, it was kind of that mix a little bit Tier 1, Tier 2. And now 2 quarters in a row, we've been able to see both of those pace nicely. And then if you look at some of the other dynamics, consumables were very strong. One of the highest quarters we've seen in a while, last couple of years, I think, -- and then -- but equipment also showed some good signs, again, and that's been a bit more of a choppy, I'll say, recovery really across the industry, but saw good strength there. And then I'd just highlight 2 new modalities, that's a big focus for us. 20% -- or more than 20% growth, a record quarter for us. And so continue to see that our offering and our ability to offer customer solutions in that space is really picking up a lot of momentum. So overall, great quarter. Anything I missed Steven you would highlight?

Spot on.

Great. So if you were looking at your heat map, a lot would be green.

Yes. As you see that I have them on here, and that's exactly what we look at. A lot of greens in the heat map today.

And I know that coming into the quarter, you were expecting a seasonal softness, and you didn't see that. So what was the biggest source of upside surprise if you had to name 1 or 2 things that were divergent from your plan rolling into the quarter?

Well, I would say that, Dan, that from a seasonality, third quarter was a bit more in line with that first half, right? And then our guide obviously implies a nice tick up in the fourth quarter. So we -- I would say that the seasonality was as we expected, right? And that third quarter tends to be a little bit lighter. Just a lot of -- I can poke on my boss, who said, okay "Hey, I'm French, I like to take a month off in summer". And so certainly, the -- I'll say some of the European business, we see slowed down a little bit. And that's typically what hits in that seasonality in the third quarter. And then you see that kind of that recovery in the fourth. And so I think really, it's what we had expected for the third quarter and what we had planned for.

And then you mentioned consumables strength being the best it had been in a couple of years. Remind me where destocking fits into that narrative?

Yes. So I think for us, we believe that it's primarily behind us. The -- I'll say what we're seeing within consumables. And again, our company -- that consumables covers a lot of different ground, right? And so it also is important to look at the pieces. ATF, for example, would sit. And most of that would sit in the consumable side, and that was a really big source of strength for us. So both from a franchise perspective, from filtration and then in consumables as well. But -- so our view is that a lot of that destocking has taken place. There's still going to be pockets of it. But overall, we think we're largely past that.

And anything you'd flag from a regional dynamic?

We saw strong performance really across all the regions with the exception of China, right? And China has been certainly a soft spot for us this year. We talked about it being about 4% of our sales. So it's where we expected. I think we'd say that -- we're hopeful that it's kind of bottomed. They're bouncing on the bottom, right? And so that certainly as we go into next year, we won't see the same order of magnitude of headwind that we saw on '24 but when you look at the other regions, again, North America continuing to do well, -- and then if you take out China from the rest of Asia, again, a lot of great momentum there. And that will be -- continue to be a big focus for us as well. Again, Olivier spent a fair amount of his career in Asia and really feels like there's a lot of great opportunity there that we can continue to, I'll say, tap into a bit more and even grow in a lot of spaces that may not be in China. But -- but again, we think that starts to get back. But '25 for China, again, it's probably neutral as the way we're thinking about it at the moment.

In Asia, ex China is a big priority...?

Yes, absolutely. Absolutely. I mean South Korea, Japan, especially Singapore, those are kind of -- if I cut the order the 3 big players and areas that we're doing well in, but that we feel like there's a lot more opportunity in room. You look at a lot of the -- I mean South Korea, especially the big CDMO players, there's still going to be a lot of opportunity to continue to partner there.

Okay. And I know you made a couple of comments or Olivier made a couple of comments on the call around the order book quality. You made some comment about the 50% probability funnel. Can you revisit that? What's the 50% probability funnel? And what's the importance of that metric?

Yes, that's a great question. So when you're -- when we have our commercial team and our product team out in the market, determining where is the next opportunity, right? What's the next customer that we can partner with, what programs are out there, what new facilities. We capture all those in a pretty robust database. And then we track the opportunity. And then as time goes on, we track effectively what's the probability of that converting to an order. And so certainly, there's a time element, right? As -- the further you go along, you hope that probability would tick up. And then there's obviously just the inherent opportunity in how we think we are competitively in creating value. And so that funnel is 1 that we look at -- and the greater than 50% probability is, again, there's a lot of other tail of smaller things that might be less than that. But as that goes greater than 50% and then even up to the 90%, then again, we're more satisfied or expecting it to be able to convert. And so when we look at that as a okay, what's the leading indicator of our order growth. If we don't have it sitting in that pipeline, then there's less chance that the orders will grow. And so that's why we are highlighting that our greater than 50% probability funnel or order pipeline was up over last year. And so that's the is it 30% -- ?

Yes 30%.

Yes, 30% over last year. And so that's, again, a great indicator that there's traction in the market. There's a lot of opportunities being, I'll say, work and that, that can result in orders on the other hand.

Well, it's -- well, so 2 things. One, so that was messaged or communicated in part to convey the quality of the funnel? I'm correct?

Yes, because again, the quality of the funnel would be if you're heavier on the lower than 25% or lower than 50% right now -- level of quality.

Yes. So then the funnel has gotten higher quality -- but then just the magnitude of that growth, I wasn't sure what to do with. I mean, you don't want me putting 30% growth in a forward period -- trying to figure out? How to reconcile or frame that in context is something I'd put in the spread?

No, that's a good point. I mean, again, I think we cut it off at 50%, 75% and 90%, right? So is that -- if we were to parse that out, of course, the that growth rate would likely sort of temper a little bit. But again, it's still 50%, right? So it's not all going to convert by definition. And so -- so again -- but if you don't have it -- it's back to my point, if you don't have it there, you're not going to book an order 6 -- 3, 6, 9 months later.

Got it.

And Dan, to Jason's point, there's varying degrees of those 50% probability is converting to orders. So if it's a small-scale project, it's probably in that 3 to 6 months, larger scale, 6 to 9 or even longer as well. So it's spread across.

Okay. And can you talk about the importance of that book-to-bill metric? I know at times you thought it was overly obsessed over and maybe not the best metric to use for forecasting your business. I'd love to learn more.

Yes. In fact, you didn't have -- you haven't heard us say book-to-bill this quarter even when asked, look, our view is that it was a great metric to understand when -- was there an inflection point on sort of the downward trend of the market and we hit that point where all right, things are going back and at what level and speed -- and again, if you're not bringing in more than you're selling out, you're just decreasing backlog and/or not keeping up with growth. And so it's such an important metric as we've gone through like the last 1.5 years. I think -- as you go forward, though, it's just less relevant, and it's really about the growth rates that we've talked about. And are you growing your sales? Are you growing your orders. And so again, we've just -- we're trying to transition away from it, and that's why you didn't hear us use the term. And we're just saying, hey, lease maybe hopefully, it was clear to everybody. If orders are 4% higher than sales on an absolute basis that would have been equivalent to a book-to-bill. But we really do think that that's less of a relevant metric in a more normalized environment, and we'll probably speak less about it. These are like weaning off sort of points.

And is the idea that if revenue is growing at a rapid clip and orders are also growing at a rapid clip, you might have a book-to-bill, which is an impressive, but hey, your orders are growing at a rapid clip and so is revenue. And so.

Yes. I mean, absolutely, right? And to your -- again, why order book -- your book-to-bill can be great if your revenue is low. That's not what you want, right? So it's just a lot -- there's a lot of nuance to the metric, and you have to look at a lot of pieces underneath. And that's why I think we're just back to, look, are we growing those at the levels we need to. And again, we will still walk into every quarter where we still need to book orders within that quarter to then ship out, right? And so -- so that's the other piece that we look at. And so again, by definition, was it maybe 1/3 of that -- of our revenue is still going to be kind of always a 1:1 by definition because you're really walking in with maybe 2/3 in backlog. So that's the other way that you've got to kind of think about this, too.

Okay. So if I heard you correct, destocking isn't a theme for Repligen in point. So the customer base, I guess, you could almost infer from that, the customer base is largely normalized, but your revenue growth rate remains below trend, below your standards. So what's the gap between those 2 at this point.

Yes, it's a great question. I think that if you look at some of the, again, the soft spots that we are paying close attention to. I mentioned China, right? So again, in an overall market growth in China was -- has historically been a very big contributor to that. So if it is below the average of market growth rate or even a drag for us at the moment, that has an impact. I think the other area that we continue to watch, and I think a lot of folks have been talking about this is sort of this, call it, emerging biotechs or early space where, again, if you were to look at our total pharma as an example, our growth is largely in the big accounts right? Maybe the second tier accounts, but the small tail of more the emerging has certainly been a softer spot for us. And so we hear kind of some mixed results on trials, right, new trials. We also hear kind of this dynamic as well with funding where it's -- in both cases, they're both better than last year, but maybe not picking up at the rate that everyone is looking. So that's the other area that we continue to watch. Again, I think that we -- we are encouraged by the picking up for now more consistent activity with that Tier 2 CDMO. That was a space as well that we think ends up being a good indicator of the market overall. And I do think this hardware sort of dynamic in spend is still going to be something that the industry and Repligen are going to kind of continue to watch. And I think those end up being some of those drags against some of the other positive signs we're seeing. But net-net, we still see the right positive momentum.

How important were China an emerging biotech to the former trend line growth for the market?

I don't know the numbers, but certainly, China has been a big contributor to growth for the industry a while, right? And you can argue as well that maybe even some of our peers and others in the industry had an even larger, of say, exposure and opportunity in China than Repligen did -- so that's why, again, we're at a point where, okay, yes, it's been a drag this year. But at 3%, 4% of total business, right, it doesn't have the same kind of impact that it did. Do you remember at its peak, where were we at?

[indiscernible] 6% of revenue. Yes. It was about 10% of overall revenue. But just keep in mind, so at the peak, it was about $80 million, but about $20 million of that was COVID related. So true base revenue of China was about $60 million at the peak.

Yes. So it's hard to say on the overall, but I think everyone would suggest that you don't grow at some of the that, that growth rate of the industry is seeing was certainly buoyed by China growth. And so that's where we'll have to continue to watch when that comes back. And look, there's some positive signs there, right? Some -- some stimulus, I think that you can see more clear line of sight to getting into the industry and the players there, and you're going to have to continue to watch. I don't think it's -- our view is that this is not a long-term issue. But how long it takes to get back or when it gets back to more of a growth, I think it's still the open question. But I think we'd be naive to believe that, that will be a continued source of growth -- source of growth for the industry.

Yes. What I started with is if the historical trend line for the bioprocessing industry is call it 10% growth how much of that was kind of how much of that was emerging biotech. And if I want to adopt a different view on the go-forward what's the new number?

Yes, absolutely. And again, the go-forward sort of short term versus meeting, right, and how that plays out over time. because I think both of those start to come back.

And then maybe this is a good time to talk about just your fourth quarter seasonal ramp here and your confidence in that ramp to think about just the immediate term here.

Yes. So -- so again, right from the beginning of the year when we gave our initial guide, we always recognize that fourth quarter would be a strong step up from certainly the first half and the third quarter with the seasonality we talked about. And that's playing out exactly as we expected. Here we are certainly now with 1.5 to ago, I think Olivier as well mentioned it that October was where we had expected it to be from an order. So again, there's good visibility to the demand. And now frankly, it's on us to execute and get things out the door. So we have line of sight to that. And again, for the guide, we feel good about the range that we've shared.

Okay. Another thing you shared on the earnings call was a few framing thoughts for 2025 -- can you revisit those?

Yes. I mean a couple of -- the thing I wanted to just kind of make sure that folks were thinking about was the impact that the restatement on this one transaction that we had to correct for as well as some other -- what at the time was kind of de minimis COVID business that we had in the first half that we think about that now is as a headwind in '25. I mean, honestly, we were really excited about not talking ex COVID or base and really wanted to put that behind us in '24 and then in '25. But the reality is we will walk in with about $11.5 million of headwind for COVID business in '25. And that could be almost 2 points of growth, right? So that's why we just wanted to kind of reiterate that we still feel that this low double-digit growth in '25 is a very reasonable way to think about our -- where we're going to land. We obviously haven't given guidance, and we'll do so in February. But that low double-digit growth would be ex-COVID, right? And so that's how we're thinking about that. And I might even go further at the margin level, too. Gross margin in '24 got about 0.5 point better because of the restatement as well. And we had been talking prior to that, that we could get about 100 to 200 points of gross margin expansion. In '25 and kind of the next couple of years, I'll say, as we tick that back up. And I'd say that view is unchanged at the gross margin level. The op margin, though, we actually get a full point -- or nearly a full point of increase in '24 from the restatement. It's just that 100% margin coming through with that volume leverage. You get the full point -- and so now as we're thinking about op margin, it may be that similar 1 to 200 points of expansion where we had kind of suggested before that that would be the gross margin plus something else on top of that. So that's what we're sorting through. I think the takeaway is absolutely see line of sight to margin expansion, recognize that's something that's been a priority for us. And I just want to just -- and we kind of end up in the same endpoint that we've been expecting to, but now with the different jump off and so that expansion year-over-year ends up being compressed at the op margin level.

Well, it sounds like you're even more optimistic on the gross margin line. You're thinking 100 to 200 basis points [indiscernible].

Yes 50 points and we'll be able to work through that Yes, absolutely.

Okay. And anything specific you would point to? I know it's 50 bps.

No. So for next year, the -- I mean we'll -- I mean 1 thing I'll highlight, too, is as it relates to profitability, though, and I can go back to this a little bit more, but we will see some price lift, and I can share some more thoughts on price in a second. But in terms of our margin expansion, we'll see some benefit from price, we'll continue to get volume leverage, right, as we grow. And then I'd say that the team just continues to build the muscle on generating, I'll say, good old-fashioned productivity, right, in our factories. And we have what's called our Repligen Performance System, RPS. It's how we track our programs and our projects and factory-by-factory. And we'll -- and again, the thing I'd like to share is that -- this isn't a onetime, oh, let's get back to where we need to be. This is the muscle that could manufacturing, sophisticated manufacturing companies have year after year. And because every year you walk in with pressure from inflation, you walk in with pressure from salary increases for your labor, and you've got to offset that with productivity. And so that's how we see the kind of the equation playing out. And just back to price because that's been a question as well. We've typically seen 1% to 2% price, I'll say, net realization. And what I mean by net realization, meaning we always go out and raise I'll say, our catalog, our list prices. And then it's a dialogue with customers around, okay, do they take that on or do they get a discount off of that. And certainly, there's a lot of things that come into play. When we walked in to '24, we assumed that market conditions would, I'll say, prevent us from seeing a lot of that falling through, right? And so we were very clear that our assumptions for the year are more of a, call it, a flat price. I mean the good news is that customers continue to see the value we're bringing. They see the competitiveness that we offer. And therefore, we will end up now in '24 with about 1% to 2% price benefit. And that gets us kind of back to more of that normal run rate. And we feel like that also translates to sticking around in 2025. So that will be a part of that equation, too.

Okay. So that was a source of upside in 2024.

Yes, it's been a help for us as well with all the puts and takes on margin, and so that's definitely been a tailwind for us.

And then thinking about your growth opportunity over more of a midterm framework -- what are the implications of the different revenue mix you have compared to your peer set? You're more clinically exposed and commercially exposed?

Yes. We have a lot of discussion about this one because, okay you're on the one side, once you've got a program hit to commercial, it's kind of a steady-state flow. You're going to grow with whatever that market adoption is for the drug or the treatment that you're supporting. And you love that because it kind of goes on autopilot. It's sometimes a lot more work, but you get a lot more opportunity and you get to really take a lot of different shots on goal with the clinical space. And that's where, again, we continue to see that the companies see the value that the -- that Repligen can bring with starting in the clinical space and working through the phases and even being able to support even commercial if it gets there, right, because not everything gets there. and be able to scale up. And that's scaling, I think -- or that ability to scale, I think, is what people really value with us. I also think that when you look at some of the products that we are bringing to take like our RS10 that we just introduced this year. Again, we're finding that a lot of companies, both smaller as well as bigger companies see the value it can bring in that clinical environment. And it also then allows where you've got, again, in the new modality space, especially where oftentimes that scaling isn't a scale up. It's a scale out, right? You might have multiple small lines, right, especially for individualized medicine as an example. You're not going to go from RS10 to RS30, you might have 2 or 3 or whatever RS10s . And so again, we can fit into that different environment. We bring a lot of great automation and differentiation and kind of, I'll say, upgrading the -- that lab scale sort of product for the system. And so I think that's where we still will benefit, and we'll love to see and love to see the portfolio shift to the commercial because you get that flow. But then I think the clinical is still going to be a big source of growth for us.

If I tried to wrap that into some type of a spread versus industry growth rate -- so let's say the industry is growing 8% or the industry is growing 10%. Do you have, again, an algorithm in mind about how much faster than industry to grow.

I mean we've typically been 5 to 10 points above market, kind of, call it, pre-covid -- we do believe that we still will get back there. I think it's just that timing. So whether you're 5 or 10 or when and how does the market look overall in '25. Again, a lot of great signs, but we need to kind of see how that plays out. And we still see 25% is still a bit more of a transition, right? And certainly, I talked about how we're thinking about it back to that low double-digit growth, but that differentiation in the market difference. We have to see where that plays out. But absolutely, it's still part of the algorithm. And I mean this is where you get some of the benefit of being maybe still the smaller player in the block in some areas as well. And we see that we're just continuing to take share, especially in that systems business. We've been really, really happy with the filtration systems business that we've had this year. And that really is, again, about bringing a differentiated products and adding different value. And that really is a take share sort of play for us. It's not a building out what we have and we see good momentum with, again, all sizes of companies around that, too.

Well, as I understand the industry, the share battles happening today really don't show up into anyone's P&L for another 3 to 5 years because the drugs matriculate currently competing in process development. How do you feel like your share picture, your win rate and such is looking in those earlier phases, which is what's going to contribute to your revenue growth 3 to 5 years from now?

Getting back to what was just saying, especially in that filtration system. That's where we do feel like we're -- we've got a really strong hit rate and that we are taking share. And again, we're bringing for us, we think differentiated products along a lot of different elements. It's the automation, the -- and for example, the other thing that we really are excited about is we're adding in-line process analytics technology as well into the systems. And so Olivier talks about -- he says, "Hey, when iPhones came out, you're like, "Why do I have a camera? I'm not -- I've got my nice SLR I'm going to use, why do I need that? Now that's what we use every day and you wouldn't buy an iPhone or a phone without that camera technology. And so that's the way we're thinking about this -- what our process technology added to our systems brings. It's oh, that's a nice thing. And then years from now, you're not going to be able to live without it because of the real-time data that it gives you and you can have that, I'll say, smart thinking about, well, how do I optimize my process real time because they have real-time analytics.

How do you view the biosimilar opportunity for Repligen?

Yes, we're excited about that. I mean the reality is that when a lot of things came out and even the first round of biosimilars, we just didn't have the product offering that we do today. But as they now come up and companies are -- they're able to take a step back and look at their processes, right? Because as you again -- as you get back to this commercial conversation you're having. Once you get to commercial, everyone loves that process and you just kind of put it on autopilot, so to speak, and you don't want to change it. But when you have biosimilars come through, that gives companies a chance to say, "All right, are there other things that I want to do differently and so again, in an environment where we're offering products that increase yield, right, or increase efficiency why wouldn't companies be looking at that opportunity when they have to kind of open up the books, if you will, and kind of redesign and look at opportunities around that. And so -- that's why we think biosimilars will continue to be a great source of opportunity for us.

Do you have a path to get back to that 30% operating margin ZIP code that you enjoyed during COVID?

I think we're continuing to look at what that feels like over time. Again, I absolutely see this clear path to margin expansion. We talked a little bit out for '25 and that continues. I think that -- we need to understand how the footprint of the business has changed, right? I mean one bigger drag for us is just a little bit on the -- our proteins -- and that whole business enjoys above average margin rate. And we had a business that was, by far, a majority proteins right from the start and has continued. That's not the case today, right, because we had a lot of other offerings. And so I think that's one dynamic is understanding our product mix. And I think, too, we're in this kind of space and phase of our company growth where, again, at our size versus the big players, you still need a lot of the same things, right? You still need a CFO whether you're this size or this right. You're right. And so there's this I'd say, scaling and optimization of more of the OpEx level that you'll continue to get leverage on as we grow and grow. And -- so I have to understand what that horizon looks like, but I do see this path of kind of ongoing margin expansion.

Okay. And then maybe in the final 3 minutes we have here, can you revisit the recent commentary on M&A? I think the investor community is largely struggling with what's the right deal for Repligen. And how does that look like today versus what it looked like a few years ago?

Yes. I -- so first and foremost, our stride -- our strategy and our criteria and our lens is unchanged, right? It's #1, first and foremost, is does that -- can that company bring differentiated technology that we can't develop ourselves as fast or more or with a higher return? Or can you get there faster? Can we add value to that, right? So again, a stand-alone company that looks great but that we're not helping on commercial synergies, that we're not helping to integrate technologies, again, less of an interest for us. And then you get into all the financial metrics, right? Is it accretive to top line growth? Is it maybe not a growth accretive, but it's accretive at the margin rate. And then certainly, of course, the overall return sort of view of the world and EPS accretive at what point in time. And you take all those elements. And you're looking for that -- for targets and companies that meet as many as possible, right? But you may not get them that meet all of them. And so for us, and I think the dialogue that we've been trying to share and that Olivier has been talking about is we've been primarily smaller bolt-on, smaller targets. It's just as much work to do or it's twice the amount of work to do to, I'll say, $20 million revenues as it is to do 140, right? And it's literally twice the amount of work. And so -- how do we -- at our stage of growth as a company, looking for some bigger targets that we can absorb, easier that we could still add value that bring all that differentiation, that's where we're kind of saying we're at a stage where it may be a bigger number in the past. But that discipline and that criteria and the lens are really still consistent.

Is there a time frame over which you think -- I know it's hard to predict, but where you might execute on 1 of these larger deals, and which would then give investors a better appreciation for what that looks like as we'll see it. Like is that something you hope to do in a 12-month time frame, a 24-month time frame or just more indeterminate?

Look, I'll just say that we've got a healthy pipeline. We've got a lot of -- we have a lot of our views as to what great targets are out there. And then we certainly have a lot of people knocking on our door with, hey, here are some other things you may not have thought about. So it's healthy. And -- but again, these things can take time to find the right deal. And again, what you might want may not be for sale, right? And then sometimes, it's about, well, what is for sale. And again, then I'm back to, well, if that's all that's for sale but it only meets 4 of my 5 criteria. Is that okay, right? Or do I wait for that other one that's the 5 out of 5 that may not come or that will be highly competitive in a process. And those are the trade-offs guys that we're making every day on the go.

Fully understand. Great. Well, with that, we're out of time. Jason, Steven, thank you both for joining us here this morning.

Thank you.

Thanks everybody.