Repligen Corporation (RGEN) Earnings Call Transcript & Summary

Okay, everybody. Welcome back to the 2024 Stifel Healthcare Conference. My name is Dan Arias. I'm the life sciences and diagnostics analyst, and we are on the life sciences track here. Happy to have Repligen with us: CEO, Olivier Loeillot; and CFO, Jason Garland. Guys, thanks for agreeing to spend some time with us this afternoon.

Good to be here.

I think maybe a place to start would be with a pointed question. The stock has been responding well this week. Last Friday was a little bit of a different situation. It felt like it was a function of just some of the things that have been announced with RFK potentially taking control of HHS, which got people thinking about vaccine exposure and just what might Repligen have to do with that market. Maybe Olivier, we can just start with clarifying how you see the vaccine exposure and then anything you might want to say about the way in which that situation might evolve.

Yes. Absolutely, Daniel. So I've learned about who RFK was last week, who I'm not very familiar until Friday, but then I learned about my best new friend. So we, obviously have done a bit of homework in the meantime to at least understand a bit better about where we are in terms of vaccine and in terms of mRNA and stuff like that. So the good news is our exposure to U.S. vaccines is about 4% in total -- the total business, it's only 4% and then half of it is approximately is mRNA. But even that half that is mRNA, it's not really true vaccines from the point of view, a lot of these new mRNA drugs that are being developed are called, for example, cancer vaccines, but they are real treatment. A good example of it is the INT products that Moderna is developing right now, which is being given to patients on top of KEYTRUDA. It's a real cancer treatment, even though it's called a vaccine. So we don't think that would be part of any scope because this type of drugs are extremely promising right now. So very limited exposure. We also looked at the fact like when -- during the previous term of Trump, basically, he increased the HHS budget by about 6% every single year. So it's not like there was a very difficult time for HHS during the previous term. We don't know what's going to be this time, obviously, but at least the previous term was not very negative. In fact, he spent more money than I think Obama did during his tenure as a president.

I think that 6% was NIH just for clarity.

NIH -- sorry, NIH, yes. And then the last piece, really, we looked at exposure to really pure Academy type of business being funded by the U.S. government and here on that side, we're even below 1%. So to cut the story short, I mean, we don't see a huge exposure according to our current business. And I think it's a lot of noise and who knows really what's going to happen, I think that time will tell us here.

Yes. And so just for the sake of asking, no knee-jerk reaction that you've heard from customers in terms of thinking differently or having to act differently?

No, really not at all. And, I'll be open here. This happened on Friday. So it's not like I had a chance to talk to a lot of customers, but at least the one I've been talking to, nobody really shared any specific big concern on the topic at all here.

Okay. Okay. Maybe on to fundamentals and just the way in which the business is trending. Results and commentary on the conference call, I thought sounded really good. Maybe you can just sort of take us through the journey that you've been on into this year and then what has transpired in the middle of the year that has you exiting 2024 feeling a certain way?

Yes. No, absolutely, Dan. We were very excited, obviously, by the performance we had in quarter 3. And when I say excited is because we're knowing where the industry has been coming from now for the last 2 to 3 years to finally be able to come with a double-digit top line growth was really something we're very happy about. But what's probably more important than the number itself is we really saw green shoot across the board. I mean, we had really incredible performance from CDMOs, in particular, and I'll come back to that in a minute because that's definitely important, but I wouldn't like to sort of deemphasize pharma because pharma for us have been incredible story this year. Our order year-to-date on the pharma side are in high teens right now, which is great because we've not seen that for a long time, obviously. And in fact, in quarter 3, the order intake we got from pharma were at the highest level for the last 3 years almost, Dan, because that's something we are really very happy about. So CDMO, obviously, we focus on that in the script because that's what we've been waiting for quite a long period of time and to have both orders and sales, but more than 20% for us was like fantastic results to see. And the reason why we've been so focused on CDMOs is because we are of the opinion like if CDMO go well, it means like the entire ecosystem is doing very well. And the reason is very simple. CDMO very often, they recover a year after pharma because when pharma had a half time, the first thing they do is they stop outsourcing, outsourcing early phase projects because they have enough capacity in-house, but also outsourcing maybe some of the large-scale manufacturing product because they have enough capacity because demand is low. So really, when situation improves with pharma, there is typically a lapse of time of about a year until you see CDMOs picking up. So we are very happy about that for that reason. The other piece that I think is important now it's 3 quarters out of 4, where the performance of CDMO was really good. So it's almost now becoming a pattern where it's not only punctual on 1 quarter. So we feel pretty comfortable. And finally, on CDMOs, it was both positive on the large-scale CDMO as well on the smaller scale CDMO side as well. Large scale, many of you have seen the announcement that came out. These big guys have, at least the 2 biggest ones, Samsung and Lonza have announced very, very big contracts they've signed. In fact, Lonza signed the biggest contract they've ever signed in their entire life and so on, and Samsung to a certain extent in Asia, at least a similar story. But even the tail end of CDMO really behaved very well for us in quarter 3. And here, obviously, we're trying to understand because what's still a little bit of a difficult child for us are emerging biotechs. And you would think like if emerging biotech do not get well, maybe small CDMOs should be suffering. There are 2 reasons why we think small CDMOs are doing better right now. One is some of them are benefiting from the BIOSECURE Act, and we know we've heard that from a couple of small CDMOs in the U.S. that they're starting to get some of these projects coming into their plants. But the other reason is back to the large CDMOs doing better is -- large CDMOs, they don't like too much early phase projects, whether it's coming from a top pharma, whether it's coming from a small pharma, they don't like those projects. They don't want to book their resources on too many of these early phase projects because they know like probably only 10% of these projects will make it to the commercial phase. So I suspect there is a bit of a reason now that bug CDMOs are doing better. They're probably a little bit more picky in terms of what early phase projects they want to pick up and then probably this is one of the other reasons why small CDMOs also benefiting from it. So really great performance on that side. I just end up saying new modalities were also fantastic and this has been a traction we've had now for several quarters. But you see like year-to-date, both our order and our sales are up minimum mid-teens up to high teens for new modalities is also very encouraging for sure.

Okay. Helpful commentary. Lot to ask about there. Maybe just to touch on the Biosecure Act commentary. Do you feel like your exposure on non-China CDMOs, it outweighs what you do on the Chinese side such that you can think about this as being something other than a zero-sum game if we're gaining it in the U.S. and Europe, and we're losing it in China, maybe that doesn't necessarily feel as good as it would if you weren't like...

That's a great point. So I think it's definitely positive for us. There is definitely a little bit of loss on one side, gain on the other side. But I would say, overall, it's positive for us and especially knowing the huge headwind we've had in China for the last 2 years, I mean, to grab some of this business back with U.S. CDMOs is definitely very good news for us.

Yes. Okay. And then one of the things that we talked about recently is the idea that CDMOs are improving. A lot of that has to do with Tier 2 activity. Those are the CDMOs that I think about as taking a bunch of the small biotech -- and you kind of alluded to this your prior answer here. But can you help me just square away the commentary that you made on the call, which is that small biotech, emerging biotech, is sort of the one area where you have yet to really kind of see the uplift, but yet Tier 2 CDMO seem to be doing better?

Yes. No, no, absolutely. I mean that was the only real disappointment for us in quarter 3 because China, we knew it would be a difficult situation. Emerging biotech was probably the only real disappointment for us because we had a good situation in quarter 2. I mean, in fact, we had a nice rebound of small biotech order in quarter 2. So we were hoping that the pattern would keep on going in quarter 2 and this did not happen. So we've tried to reunderstand a bit more why is that? So like anybody else, we are looking at all the data that exist and what you can potentially directly link to small biotech, one side is biotech funding, obviously. And then the other topic is clinical trial start. So on biotech funding, I mean, year-to-date, the funding is still up significantly. I think it's about 43% versus last year. What we like a little bit less and what I could imagine a small biotech CEO like even less than we do is that the trend is down. I mean I think the funding was about $18 billion in quarter 1, went down to $15 billion in quarter 2 and then down to $12 billion in quarter 3. So if I would be a small biotech CEO and I would look at that, I would say, "Wow, what's going on? And do I need to be a bit careful again and then start to be a bit more sure that I'm going to be able to still pay the salaries of my employees in the next 3 to 4 quarters." So that's one of the components. The other one, which is a bit more difficult to read is really clinical trial starts because we have 2 sets of data. One suggests that the number of clinical trials start this year is kind of on par with the number of clinical trials start last year, which is not great, but which is not catastrophic. The other one, which is a bit more concerning is we've seen that in the U.S., probably there is about a 17% drop of clinical trials start year-to-date versus last year. And again, those 2 data are not corresponding to each other perfectly well. But that's something that would potentially suggest indeed like the small biotech have been suffering to launch clinical trials this year around.

Maybe just to sort of put the point on the Tier 2 and not large CDMO piece. There was a point midyear where revenues and orders ex the large CDMOs were sort of flattish. Can you give a sense for what orders might be in the not top 10 category right now? I don't know whether that was a number that you provided on the call. If not, is there sort of -- is it up?

No. I'm not sure. Yes, I'm not sure of the answer...

Okay. It's up, but I don't recall the exact number.

Yes, that's fair. Maybe on the large pharma side, Jason, let's fact check Olivier there. He said up high teens year-to-date. I think it's up mid-teens. Is that right on orders year-to-date? I don't want to put him on the spot here. I just want to make sure I get the number correctly.

Mid-teens.

Mid-teens.

It's somewhere in between, in fact, yes.

And orders are tracking ahead of revenues, if I remember the correct commentary there. So assuming that 4Q kind of plays out the way that you're thinking or the way that it seems like it should, is there a flaw in a logic to think that as a category, large pharma -- as a customer category, large pharma revenues could sort of be up in that ballpark? What would be the thing that sort of makes that untrue?

You mean for quarter 4?

No, for 2025, if we're just looking at a mid-teens order rate, accelerating faster than revenues, we're all just trying to put together the growth algorithm for next year.

I mean, as mentioned earlier, I personally think like pharma always a bit more or less a year ahead of CDMOs. So the question now is growth on CDMOs next year are going to be overcoming growth on pharmas. I think there is a fair possibility that's going to be the case. And then -- but whether one is going to be low double digit, the other one is going to be mid-teens or whether it's going to be the other way around or one slightly, this we don't know for the time being. But considering we had really nice growth on pharma this year and a bit less because year-to-date, we are still down in terms of sales on the CDMO side, it's probably fair to assume like growth will be coming mostly from CDMOs next year, I would imagine.

Okay. Anything to be said on order size because to me, that sort of speaks a little bit to the confidence that maybe -- I guess, maybe inventory levels and finally, feeling comfortable with the point that those have been normalized. It's not a giant debate at this point. I feel like that's largely been accounted for. But larger order sizes, were they to actually materialize, would also feel good just in terms of thinking about the bolus of work that you might have. And then also thinking about whether or not there are episodic projects that come in and out. And so therefore, you would get caught with an inventory situation that maybe you didn't see. I don't know whether that makes sense or not, but just order sizes, have those increased as well?

Yes. So I'm not sure if I get your question. Are you thinking about whether we've got a lumpiness factor right now or not? Or...

There is part of that. I was going to ask about some of the 3Q lumpiness. But I guess the question was just when you look at order activity, are you seeing the size of the orders increase in a way that says something about the amount of work that they think they might be about to do?

So there is a bit of that for sure. I'm going to pick up ATF because we did mention it during the call. I mean our sales on ATF went up more than 50% in quarter 3. And these are typically pretty big orders. Because as you know, we got designing into plenty late-phase projects towards the second half of last year or first half of this year as well. And typically, this process intensification is going into large-scale processes. So typically, when an order comes on consumables, it's very significant in size. So that's definitely one part of the answer. The other one, which is probably going the other way around, which is that, and I love the fact while our business is extremely spread across the board. If you look at our top 20 accounts today, they represent only 50% of our sales, which is not something I've experienced in the past. I mean you very often have this 20-80 rule. We don't have that at Repligen, which I love personally a lot because it means 2 things. It means like you are not depending too much from one customer or the other, first of all, but it means also you probably have the potential to grow a lot with a very broad range of customers, which is why we've been focusing so much on the key account management side because if you've got indeed 20 accounts that are only representing 50% of your business, you know you can probably grow these top 20 accounts by a factor 2 again or something like that. So that's what we like. We are very well spread across the board.

Okay. Let me sort of take a different tack here and just ask about specifically some of the things that you talked about in terms of late-stage design-ins at large pharma companies, I believe. That's not typically something that I think about as happening frequently just because it feels like later in the process, it's pretty hard to see a switch-out or pretty unlikely to see a switch out. Was there something unique about that supply situation? Can you just sort of take us through that? And then ultimately, the question will be how reproducible might that experience be?

Yes, absolutely. So before I'm -- more specific on ATF, I want maybe to take a bit of a step back. About probably 5, 6 years ago, also FDA [ dictated ] a new guideline called ICH Q12. That, for the first time, was really guiding pharma company, how they can potentially change their processes. And change their processes, meaning how would they -- what would they need to do to get approval from the FDA to make those process changes and that was a huge change. Because before that guideline came out, nobody knew how to do that, which is why people were, well, "Oh, let's not even try it because we would have to go through a full refiling." So why it's becoming interesting is pharma companies are all different. And some jumped on it immediately and say, "Well, according to that now, we should immediately start working on the Generation 2, Generation 3 and so on." So some companies right now for commercial drugs are already at Generation 4 of a processor and some others are still using Generation 1, even though the patent cliff has already happened and they never changed anything. So what's important to realize is every pharma company is very different. Some are extremely traditional, careful and so on, some are like jumping on the opportunity to take risk and so on. So now if I look at ATF specifically, ATF is not considered to be a huge process change. It's not like if you were changing your single-use supplier, extractable and reachable profile or your cell culture media or your resin, you're just adding a loop into your upstream process which is considered to be kind of a very little change to your process. So again, depending on the different companies we've been working with, some have kind of just put an addendum to their filing and some other are going more through the very detailed route of refiling. We've got the 2 examples, some are probably capable to change their filing in a year or so. Some others probably have been working on it for 5 years already and are still not there. So it really depends on.

One of the things that, Tony, used talk about, not quantitatively, I always used to ask him if he could put some numbers around it and he would find a way to not do that. But he would talk about platform accounts and just the number of those that you have that are more than just a single point provider. It feels like that number or whatever it is, is going up. Do you think that, that helps you do what you're saying, which is find an open door on a process change if Repligen is a known supplier in some other part of the process and now it can just be about getting ATF into that Version 3 or Version 4?

For sure. Absolutely. The main reason why we've put that key account management program in place, and it started before I joined, probably a year before I joined, was really to make sure like, first of all, we had a team of people capable to present the full offering of Repligen because people knew us for 2 things. People knew us for ATF, people knew us for OPUS. They had no clue about the fact we had systems. They had no clue but the fact we had the CTech analytical offerings. They didn't know about FlowVPX, they didn't know about the fleet management offering. So we realize we have to start being able to pitch the entire portfolio to customers. And then the second reason which I personally think is even more important than that is you need to get access to the C-suite level people and particularly when you are a very innovative company like we are because people on the pharma side, they are always very careful. And the only way you're going to be able to convince people to try a new technology is if the global head of manufacturing, the global head of process development, R&D, are like saying, "Wow, guys, we have no other choice. We absolutely need to implement ATF because that's a game changer for us. So we absolutely need to use prepacked column" and so on. That's why we've implemented that. We've got great successes. And you're absolutely right. Once you have one business establish with a customer and they learn you've got some more to do with them, they are just willing to do more with you because they realize they really like you for the innovation you're bringing to the table here.

Yes. Okay. So ATF being up 50% in the quarter is obviously a reflection of that win. We should not extrapolate that in prior quarters. It's probably going to reflect some of the lumpiness that would take place in a project like that. Is that fair?

Yes. I mean we are not going to grow 50% every quarter. That's a very fair answer to give. I think we're going to have quite a lot of tailwind on ATF for the reason we mentioned like we got designing in a lot of late-phase projects. In the script, we added that we just got designing into one of the top blockbuster monoclonal antibody because that's something that's going to generate another good tailwind in the next few years because you want to -- for process intensification, you really want to focus on the very big babies because these are the guys that are going to generate, obviously, the highest amount of consumable sales.

Just for query, Dan, that big win was in the orders. It wasn't flowing through sales yet.

Not yet, yes. So that's coming next year.

So that will be a 2025 payoff there.

Yes.

Okay. Maybe on chromatography. Just thinking about the things that have taken place in that market. There was a resin shortage in 2023. That seemed to resolve by the beginning of 2024, but the business was only slightly up from 4Q to 1Q. And I'm just curious how much do you think the chromatography franchise will sort of be lapping suboptimal demand in the beginning of the year? Or is the answer to that no, like it's probably a pretty even comparison for 1Q of '25 versus 1Q of '24?

So if I look at the entire business portfolio we have this year, chromatography has got a very unique pattern for us. We've been indeed a bit pressurized on the top line this year, but we've got an incredible story on the order intake on the other side. So we're indeed, and the top line pressure this year is very simple to explain is where the number of columns has increased, we are selling much less resin than we were last year. Last year, we had a typical ratio, 70-30, 70% of the revenue were column, 30% were resin. This year, we're down to 80, 85 to 15, 20. So there is much less resin component this year, which we have kind of pushed for because we said this is not our business to just buy the resin from a supplier and resell it to the customer with just a very small handling fee. And so we've been kind of pushing for that. This being said, I mean, among a lot of areas of focus for us, we are really trying to focus on pharma because where CDMOs have been on embedding prepacked column very largely, we still have some homework to do to convince pharma company as well.

Yes. Jason, that will probably give me an opportunity to ask some gross margin questions. Can you just talk about the balance between prepack versus drop ship and how striking that balance allows you to be profitable at the right level, but also drive the revenue line the way that you want to?

Yes. Olivier shared kind of where we were at 70-30, now 80-20. I think that as we look at this going forward, it's not that, "Oh, it now goes 90-10 next year, right?" There is finding the right balance between that profitability impact. And then also just making sure that we have availability of resin for our customers. So there may be times where we can get it faster. There are certain customers that just say, "Look, I want to buy it all. I don't want to deal with this." And so that's where we probably land, again, plus or minus where we're at now, and that will strike the right balance.

Okay. And then just maybe more broadly on gross margins. I think the idea is for you guys to be up 100 to 200 basis points, hopefully, fairly steadily. If I look at 2024, you'll be up 100 basis points this year on a down revenue number. So it feels at a high level like there's room there, but I always know that there are considerations that maybe aren't as obvious as the highest level math. So can you just sort of talk a little bit to whether you think there are upside drivers? And if not, what the reasons for that might be?

Well, the kind of the framework we're thinking about now for '25 is that we're likely probably up 100 to 200, so a little bit better than what we saw this year. I think that as we look at all the pieces of the profitability growth, I mean, volumes, some of that, but most of your volume leverage ends up at the operating margin level. And in my view, less of that at the gross margin. We have some, I'll say, excess capacity from our building footprint, but that doesn't change dramatically from '24 to '25, right? Because we've got -- we've talked about this before that we could probably more than double the size of the business to fit mostly within our footprint. So again, we're taking a step forward, but it doesn't dramatically change us. So you still kind of have that, I'll say, deleveraging at the gross margin level. But I think the team is doing a great job generating productivity in our factories, driving sourcing savings, looking at really, we have a Repligen performance system that kind of drives the rigor around these projects. We are getting a lot of good muscle there. But at the end of the day, right, that usually ends up offsetting your inflation that you have on materials and supplies. And then, of course, you've got salary increases that happen each year. And then it's a little bit of the volume leverage and then also the price benefit that you can get. Those are the 2 things that kind of fall through, right? And we see for '24, we walked into the year where we'd assume we'd be about flat for pricing. But we found that -- and we knew that even though we were flat, we were going to be raising prices. We just didn't know how much of that would stick given the market. But so we are going to land somewhere at that 1% to 2% range and see that, that likely carries forward in the next year. And 1% to 2% is what we've traditionally seen, I'll say, historically, outside of some blip years with inflation post-pandemic. So I think that's all the equation that will kind of be continuing to push, and it's one that, to your point, helps next year. It helps a year after that, right? And we can build some momentum there. But I do think the gross margin, we'll have to discern where does it ultimately -- does it get back to kind of pre-COVID days or not. We do have a different business mix, very different than what we had in 2019, but still see a lot of room for growth over the next few years for sure.

Okay. And then on the operating margin line. Just some of the things that you mentioned play into this as well, just the need to pay good people. Olivier has mentioned innovation quite a bit. So it sounds like you guys have some things in the hopper when it comes to new product development. Can you kind of walk -- without going too specifically into what the math would be, the considerations on percentage of revenue for OpEx or just how to think about margin expansion?

Yes. So I think we've been going through, as you know, a restatement that pushed out some -- or pushed in some revenue into '24 and that's highly 100% margin all the way down to the bottom line. And so when you look at where we will land in '24, we're almost a full point higher at the operating margin level than we would have expected, and we reflected that in our guide. So now after that base line, I would have said it would probably been more than the 200 bps, the high end of that 100 to 200 on gross margin. I think it's probably more in line with that 100 to 200 now with a little bit of maybe leverage in there. And that will allow us to modestly grow OpEx. To your point, it's likely a heavier mix towards R&D. And then even within SG&A, it really becomes the S piece where we're continuing investing in commercial resources. And like we were talking a little bit last night, it may not always be a lot more people, but higher caliber, higher talent that oftentimes you pay a little bit more for. And yes, so that's the balance we're striking with getting that leverage, but also making sure that we invest for the future growth.

In core tools land, it feels like 5% organic growth is sort of a threshold level where once you cross it, it becomes easy to see this volume leverage equation start working for you. As you've taken a look at the business with a fresh set of eyes, is there any level of revenue growth that for you kind of sticks out as the model starts to click in a way that it doesn't necessarily before?

I don't know that it's 5% -- I think higher than 5% for us just with our scale.

Well, I was thinking like mid-teens for you just because it's a different type of business.

Well, maybe I'm misunderstanding the question than you're saying. I was addressing it from how much growth do you need before that starts to fall through, right?

Yes, I think that's essentially it. But I realize that for a company like Thermo Fisher or Danaher, it's a different equation than it is for Repligen.

It's the scale, right? Those guys have one CEO and one CFO, right? So it's the -- how do you -- as we get bigger, and it's how do we have the right scale to support that growth. And that's where we're still going to be -- there's been a level of investment on that as well to make sure we have the right processes to be, as we call fit for growth and be able to scale in that way.

Yes. Okay. 1 or 2 minutes left. I have to hit on M&A. That's been something that's been discussed pretty heavily with investors over the last couple of weeks. Olivier, your appetite for bigger deals, your appetite for things that maybe are longer-term plays, but are less certain in the near term? How do you think about things?

Yes. No. What I've started to reconveying over the last few days is we don't absolutely have to buy something tomorrow. I mean we've got so many great product line right now that have just been launched in the last 2 years and so on that we've got more than enough within the company right now to be able to generate the growth we need to generate, which doesn't mean we're not looking around and like we have to figuring out if there is anything that could be of huge interest for us. And as you know very well, for us, it will start with the technology itself. We are always looking for something that is new, that is very unique, that will enable us to keep on being a differentiating bioprocessing provider. We are never going to come and acquire a business that will put us as the #5 supplier on an area where we don't have anything. That's nothing we're interested in. We're looking at technologies, ideally technologies that enable us to bridge one of the potential gap we have in our offering. And then obviously, the financials have to make total sense. So -- and then in terms of size, I mean, yes, we -- the only thing we try to convey is like we were indeed a different company today than we were 5 years ago. And if I have the choice between one deal where I'm bringing $50 million of sales and then 3 deals that are each bringing me $15 million of sales, I mean, I'd rather do the only one deal instead of having to do 3 and doing the integration because an integration is an integration, takes a lot of time. So indeed, if we find a good target that is ticking all of the boxes I mentioned earlier. And if it's a little bit bigger in a way, considering we're a bigger company today, it would make a lot of sense for us as well for sure.

Okay. Gentlemen, I'm going to leave it there. I appreciate the time. Good to see you again. [indiscernible] to talk to you.

Thanks, Dan.

Thank you, Dan.