Repligen Corporation (RGEN) Earnings Call Transcript & Summary

Welcome to day 2 of the Stephens Conference. I'm Jacob Johnson, the life science tools and services analyst here at Stephens. Really pleased to be joined by the Repligen team. We have President and CEO, Olivier Loeilliot; and CFO, Jason Garland, up here with me and Steven from IR in the audience. Before we get started, this will be a fireside chat. I'll try -- I've got plenty of questions, but I'll try to pause along the way if anybody in the audience has questions.

So with that preamble out of the way, Olivier or Jason, I'll turn it over to you for any introductory comments you'd like to make, and then we'll launch into Q&A.

Well, good morning, everybody. We are really happy to be here with you today, and it's always a pleasure to join the conference that Jacob and the team organize here. So yes, as Jacob mentioned, very happy to answer any questions you might have. We were very happy about our quarter 3 results. So we're going to be happy to give you more details today and again answer any questions you have.

Perfect. So Olivier, maybe we'll just start super high level. A lot of things going on in the bioprocessing space the last 5 years. Just maybe on the current state of the bioprocessing industry, how confident are you behind -- or how confident are you that destocking is behind you? And then what are the kind of key macro swing factors from here that will determine the kind of pace of recovery?

Yes. No, maybe I'll start taking a bit of a step back. I mean, as you all know, we entered into 2024, having quite a lot of headwinds. I mean, we had the protein headwind. We had the COVID headwind. We had the China headwind. So when I look at where we are after 3 quarters, I mean, we are doing really well across the board finally. And I'll just give you a couple of numbers. The first one, our orders year-to-date on the pharma side are up mid-teens. Our order year-to-date on the consumable side are up high teens. So when you take into consideration all of the headwinds we had to manage, it's a really great performance overall, so we are very happy. And I just gave those numbers to kind of illustrate that, yes, destocking is certainly pretty much completely behind us. I always mentioned there might be just a couple of very small pockets of inventory still existing, and these are mostly on the single-use side where, again, during COVID, everybody was desperately looking for tubing, clamps, all of the basic single-use component and some companies just probably bought worth 5 to 10 years of this components. So that's probably really the only remaining area where you would say there is some pockets of inventory. But overall, we definitely think it's very much behind us at this stage.

So maybe just for context, as we kind of come out of this super cycle of sorts we've been in the last couple of years, I can't remember the last normal year we've had in the bioprocessing space. So maybe looking back to look forward, I think historically, there were good, great and maybe not so good years for the -- for the bioprocessing industry. Can you just talk about historically, what were the key drivers of the great years? And then what happened in the kind of more muted years for the space? And what did those cycles look like historically?

Yes. No, that's a great question, Jacob. I mean the beauty of the bioprocessing industry before COVID was it was very predictable. I mean -- and I've been in that industry for about 30 years. I mean a bad year for the industry was about 8% growth and a good year was about 12%. So when you were entering into a new year, you were just debating whether it's going to be the lower end 8% or more the higher end 12%. And obviously, if you were a company like Repligen, you will always think I'm going to do better than that anyway. But I think what made a year being better or maybe lower was there are 2 potential factors. One could have been some geopolitical effects. Even though this is an industry that was never very impacted by that, but there were some specific events. I mean, if you think a bit about the big crisis, financial crisis, it did had some impact a little bit on the industry. That was probably a year that was of the bracket. So there is a little bit of that, even though it's one of the industries that probably suffers less from this type of event. The other factor that I think has impacted more in the past was when there was a new class of drugs coming that had a huge potential. And I remember when this anti-cholesterol monoclonal antibody drugs made it to the market, I mean, this gave a huge boost to the market. So that was a year where probably the overall growth was even more than 12%, probably 13%, 14% or so. So when there is a new class of drug coming, it can have a huge on the overall market growth as well. And obviously, we're probably going to talk about it. There are some of these new class of drugs coming right now, which should definitely be one of the tailwind for the industry in the coming few years.

Got it. And then just 1 follow-up on destocking. You mentioned maybe that there's still some pockets out there. But I think what's been tough for us to see is you kind of maybe had artificially high demand during the COVID years as people built up inventories. And then presumably, more recently, people have been utilizing your products probably more than they were buying from you as they work down inventories. Do you think the kind of revenue trends you're seeing right now represent the utilization rates from customers? Or do you think there's still a little bit of an opportunity to see some catch-up as customers -- some customers return to more normalized levels?

Yes. So that's a very broad question, Jacob, because and I'll try to be concise, but maybe there are 3 sides I'd like to cover here. The first one is, unfortunately, we are dealing with an industry that has never been particularly strong at forecasting. And it's a nice way to say it. I mean we are always struggling to get very accurate forecast from customers. And I don't think COVID has improved it from any angle at all because on the contrary, it has added another dimension where people rush to buy even more and then realize, oh, now we've got probably too much for the next 2, 3 years. We're out of that cycle. But let's say, the first factor is forecasting has never been the biggest strength of the industry here. The second factor that I think we need to think about as well in terms of potential growth of demand and so on is there are a lot of new modalities as we all know, and we are not sure yet how fast the pickup is going to be on that side. And I mean take the example of the Sarepta drug. I mean, this has been like going back and forth. And those guys obviously were very optimistic, and they probably built a lot of inventory and then they got only the partial approval. So then probably all of the suppliers now won't see any color of any demand for the next 5 years and so on. And then they got the extension and now probably we are back to our demand is going to increase a lot. So I think new modalities are so new for everybody, including FDA and so on that it's becoming less predictable to really know when are these guys really going to make it to the market and what's going to be the exact demand signal on that side. So I think that's another piece really to take into consideration. And then the last piece really, I would say, is Asia. And I call it Asia this time because I think Asia has become a totally different Asia today than it was for sure prior to COVID. Prior to COVID, you really had China like was generating more than high teens growth, probably above 20%, 25% growth year-on-year for the previous 5, 10 years before COVID hit. But the rest of Asia was somewhat a little bit less growth, less speed and so on. And now the picture has flipped completely the other way around, where a country like South Korea, Japan are growing extremely fast, and China has been like much more challenging for the last few years. So what's going to happen is China going to pick up again at what speed, what's going to be the play for U.S., European supplier and so on? And then what's going to happen in South Korea, Japan, Singapore and so on. So that's the other dimension that probably will also potentially generate some more tailwind from my point of view.

A couple of things to unpack from that -- this -- you laid that out. Maybe let's first just get to new modalities. I think actually what might be helpful, and I think you've talked about it before and others have, but nascent industry, still early days. probably a lot of people, myself included, following the space, were not around for the advent of Biologics. Could you maybe give us a history of are there any parallels between the ramp of cell and gene therapy and biologics?

Yes. No, absolutely. I mean, again, what's interesting in life sometimes is you learn from experience of what happened. I mean, again, I remember I used to work for Lonza at the really beginning of the CDMO business model. And we were like really ahead of anybody else in terms of antibody to conjugate as early as towards the end of 19s, beginning of 2000 and so on. And everybody thought like antibody drug conjugate will just kill the market completely, and there will be no more mAbs and everybody will switch to antibody drug conjugates. So company -- specific companies invested a huge amount of money building manufacturing sites. And then there was a bit of a hangover period after 2 to 3 years where people realized, well, it's more complex to manufacture, there are more side effects potentially, handling the toxin is very challenging and so on. Because then everybody like see the way round, it is bad, no antibody drug conjugate. And here we are now 20, 25 years later where it's like the fastest growth -- growing new modality. So same happened with CAR-T exactly -- well, what oligonucleotide in between and CAR-T and now with gene therapy. So I think everybody needs to visualize those new modality like in -- like a curve where you have 2 phases, and you got the first 3 years where it's probably going to grow like very highly because every consultant -- pharma company, you should all do that and nothing else. And then there is always a bit of a hangover for a period that can be some time like up to 3, 5, 10 years in some cases. But then when the second wave starts and typically, this is where you start to see a very, very solid and then they are very long-term type of growth. But I think we're going to see with most of these new modalities in the future.

Got it. And then maybe kind of double-clicking on that I think we call them emerging modalities now which includes cell and gene therapy. I think record quarter in 3Q. Can you just talk about what's driving that strength? Is this specific commercial customers? You mentioned one that is topical for people. Is it cell and gene therapy, CDMOs? Is it your product portfolio? Is it all of the above?

Yes. No. I mean we are very delighted by what we're doing on that side, to be honest with you and coming from another side earlier and so on. I know like we are the right-sized company to be able to support this type of smaller products. And when I say smaller products, a lot of them are coming from big pharma, by the way, it's not like new modalities are only coming from small biotech. In fact, the majority is coming from big phama. I mean, if you are a big pharma today, it's very often like more than half of your funnel is on new modalities. So what I think we've always done and we will do in the future is make sure we bet across the board. You can't just go full speed on 1 modality versus the other. I mean, we have to play everywhere. And we said last year, new modalities were about 18% of our sales. Majority last year was the gene therapies, and mRNAs and lentiviruses cell therapy. Think this year might be a little bit different. I don't have the exact number yet, but we are making sure we are well positioned on each of these different buckets. And what we love is we have a very broad range of customers. I mean we've got probably now I think about 25 customers that are above USD 1 million of sales per year for us and we love that because it means like, again, we can absorb potentially a couple of bad news and compensate with other customers. So that's how we see the market.

Maybe just to get out of the way, new modalities includes mRNA, which you mentioned, obviously, vaccines a bit topical the last week. I think Dan beat me to the punch on -- you quantified it for Dan yesterday, I think 4% vaccine exposure. But any other comments you want to make about kind of vaccine exposure or any kind of macro risk. And then maybe while we're on it, just mRNA beyond COVID, but I think that's been something to debate if you have any thoughts on that.

Sure. Maybe the thing I would add to what we talked about yesterday is the new vaccines are being developed, based on new modality, are not real vaccine when you think about it. Remember, when we were kids and we got this vaccine shot and so on, that was indeed to get protected against potentially getting polio or getting meningitis or getting one of these bad diseases 5 years, 10 years, 20 years down the road. The vaccine that are called vaccine today are not really vaccine from the point of view, they are here to cure. I mean they are here to cure you from a cancer, for example. I mean if some of these mRNA vaccines that are being developed right now are focusing on some of these works, cancer that you can get diagnosed with, they are just here to cure you. So they are call a mRNA vaccine, but in principle, they are like any type of other drug. So even though we said it's part of the 4% of our sales exposure, I don't think it's a real vaccine. I mean that's probably going to be treated like a normal drug. So our exposure is somewhat really limited at this stage, yes.

Okay. And then maybe just following up on Asia Pacific, just to double-click on I think when people think of APAC, they think of China and for good reason of the growth that we've seen there over the last decade. But to your point, there's a lot going on in South Korea. There's some big CDMOs. We'll get to the CDMO space in a bit. But can you just talk about APAC beyond China? And then just on China, a good grower historically, do you think anything has changed about the growth trajectory? I think local competition has kind of picked up. Any thoughts on that?

Yes. No, absolutely. I'll start maybe by the outside of China picture because I mentioned 2 countries, mostly South Korea and Japan, and they're growing very fast, but for very different reasons right now. South Korea is growing very fast because the country has decided like almost 20 years ago or so that biotech should be a bigger real focus. And you're right. I mean the biggest CDMO in the world is there, the biggest -- one of the biggest biosimilar company is there. And then you've got another couple of very big companies there. But what I think is even more important to know about South Korea, there is a tailwind of probably, I would say, 20 to 30 mid-sized biotechs that are growing very fast as well. And so for that reason, the Korean market has been growing very nicely and will certainly keep on growing very nicely for the next few years. Japan is a totally different picture because Japan kind of missed the biopharmaceutical wave completely in the early days, they never really managed to be fast enough to position themselves into monoclonal antibodies and so on. So then they tried to be fast and succeed on the cell therapy side, but they have been also a little bit too slow on that side. So what has really changed drastically now between COVID and now is like the government has realized there is an urgent need now to push local companies, local manufacturing of biopharmaceutical because we need to become more self-sufficient in case a new pandemic situation comes or in case anything else would happen. So the government in Japan has invested a huge amount of money into the biopharma industry over the last 3, 4 years. In fact, there are a couple of companies that just didn't exist before COVID that have just gotten birth and were just 100% on entering Japan has got some more of a known play in the future run because 2 countries are definitely growing very, very nicely for different reasons. Talking about China, and I've always been very bullish about China. I spent a lot of time in China doing business there in the past. The market has changed completely, Jacob. And you kind of alluded to it. It has changed completely because, first of all, the government focus has changed completely where the government was just focused on biosimilars up to probably 1.5 years, 2 years ago, they started to realize like having 10, 15 version of the same monocular antibody as a biosimilar didn't make any more sense for them. And that they had little appetite to continue investing into a number 16, 17 biosimilar of Avastin or [indiscernible]. So they have kind of decided to really push pharma company to become innovative. And I mean, as you can imagine, very well, we are not exercising the same muscle developing a biosimilar or developing a brand-new drug. And there was really basically only one company that was doing that, company called BeiGene, they just changed name last week, by the way. But there is a couple of other Akesobio and probably Innovent as well is trying now. But we are at a point where, first of all, this local company have to change their area of focus completely. But also they are facing reimbursement prices that are a fraction of the prices that is getting reimbursed. Here, you look at PD-1 drugs. And I'm going to tell you, the reimbursement is about 5% off of the reimbursement here. So when you get 100% reimbursement here, you get 5% in China. So you can imagine that you have to be very efficient on cost and you have to find a way to survive. So that's why local manufacturing has picked up very significantly here. And I think for a company like ours, there will be a player game, but you're only going to be successful if you really bring innovation. Because if you have me-too products, I mean there is going to be much more than enough locally. So I think we're going to be successful because we are the innovation company.

Got it. Just a couple more on the macro. Maybe just CDMO demand. I think Tier 2 CDMOs kind of came back in 2Q. It seems like the bigger guys came back in 3Q. I think Catalent's inventories have been down the past couple of quarters. Can you just remind us how much of your revenue comes from these CDMOs and maybe flesh out what you're seeing from that customer base?

Yes, no, absolutely. So last year, approximately 25% of our business was coming from pharma and about 55% coming -- sorry, 25% from CDMO and 55% coming from pharma. I think it's going to change for different reasons. And first of all, obviously, we are seeing like a huge order increase, sales increase on the CDMO side from now the last couple of quarters. I mean, in fact, our sales at CDMOs in quarter 3 was back to the 2022 level, which is a great signal for us. We're very excited. We've always talked a lot about CDMOs because for us, we know like when CDMOs do well again, it means that overall ecosystem is really doing well. CDMOs always recover typically about a year after pharmas from the point of view, as long as pharma are not doing very well, the last thing they want to do is to outsource because probably they have less demand for new products. They probably have less demand even for some of the commercial drugs. So the first thing they do is they close the CDMO tap. Whenever they start to get it better, the first thing they do, they open it again and go to CDMO. So it's not unusual to have a year of lapse between the time pharma recovers and CDMO recovers. So for us we've seen pharma recovering indeed already 5, 6 quarters ago. So now to see CDMOs recovering that much is a very good signal for us. And what we liked a lot was also -- we saw really improvement on both sides, both the large CDMOs as well as a small one. Large ones, you've read a lot of announcement from the big guys lately, signing very big contracts. What was a better surprise for us, was the small CDMOs. And maybe you remember in quarter 2, we mentioned like we had both recovery of small biotech and small CDMO. We didn't have the same in quarter 3. And we had a very nice recovery still of small CDMOs, but we didn't have of small biotech. So we try to understand why are small CDMOs doing better? We think that there are 2 potential explanations. The first one is the Biosecure Act. And I know for sure, talking to a couple of CEOs like they are started now to get projects coming from the China CDMO that has landed into their pocket. And then I think the reason why they start to do better, even though small biotechs are not doing very well is because the large CDMOs are doing much better, and somehow when they do much better, they start to be more picky here. And when you are a large CDMOs, you don't like early phase projects because they are like blocking all of your R&D resources and you want to just focus on the large scale processes. So from that point of view, I think the tail end of CDMOs is also probably benefiting from that right now.

Got it. And then you alluded to kind of biopharma trends, but maybe we'll also just double back on that. I think early-stage customers, small piece of your business, the ones you're sensitive to funding, but kind of what are you -- any thoughts on why those were better in 2Q and maybe a little bit lighter in 3Q? And then just again, kind of a similar question on pharma side, which has been stronger, obviously.

Yes. No, absolutely. We're trying to understand that, to be very open, Jacob. I mean we were very happy in quarter 2 to see both small biotech and small CDMOs say, "Hey, we're back, everything is fine. We're back on track, no issue anymore. So to see small biotech down in quarter 3 was the only real negative news we had from our business side. I think there are a couple of potential reasons. And the first one is where biotech funding has been doing pretty well this year. I mean it has been now going down for 2 quarters in a row. And so year-to-date, the biotech funding is still up like 43%, 44% versus last year, which is great. But when you look at the quarterly pattern, it went from $18 billion to $15 billion to $12 billion. So again, small biotech CEOs who have been burned so much over the last 2 to 3 years. I can imagine they are like watching that very carefully thinking is it now going to go down from $9 billion -- from $12 billion to $9 billion. And then we are back to a bad cycle. But that's something to watch. Again, overall this year, the number is still good. So we need to watch quarter 4. And then the other indicator you want to look at is obviously clinical trial start. Here, there are a couple of data circulating, one suggests number of clinical trials start this year is pretty flat. Another one suggested in the U.S., in particular, year-to-date, it would be down 17%, which would kind of confirm that some of these small biotechs are still waiting a little bit to kick off more of this clinical trial. So something to watch, again, that's the only kind of little area of concern for us. It's only 10% of our sales, small biotech, but that's the last piece we would like to see recovering fully in the next few quarters, for sure.

Got it. And maybe the last kind of macro question for me. Just this clinical versus commercial, as we're thinking about next year, I think there's a view from investors that commercial will recover better next year and maybe clinical, there's some questions. Anything you're monitoring on that piece of it besides the funding environment? And then I think just kind of longer term, I think there's been a thesis from people for some time of, hey, you've got more clinical customers. Ultimately, the pipeline progresses. A lot of these products you've launched in the last 7 years have been ceded. And at some point, law of averages would suggest we get some commercial approvals and the volumes there bigger. Just thoughts on that opportunity longer term.

I can tell you, Jacob. I love the fact we are 65% in the clinical. And that's not going to last forever. I mean, I've gone through that journey myself. I mean, when I joined what was GSK Life Sciences in 2010 was about the same story here. So we are going to slowly but surely move toward more commercial exposure. I think we enjoy being there. And I mean, if you remember, when we were -- talked about our quarter 3 results, our ATF franchise sales went up more than 50% in quarter 3. That's a perfect example of being in clinical product being a real tailwind because when you have these projects moving to the later phase, I mean, suddenly, the demand is increasing drastically. So we're very happy to be there. Again, we're going to enjoy it probably for the next 3 to 5 years until commercial becomes really bigger than clinical. But at the end of the day, what you want is to be diversified. And you need to be across multiple products. Because you're right. I mean if you only are on 2 advanced clinical phase product and they both fail, then you are like what's going on. We don't have that problem. We are like across so many different products right now. And as you know, have been particularly focusing on rebuilding or, let's say, building an extraordinary sales organization over the last 1 year, I want to say we've got a really, really good team right now, and we are just gaining new opportunities every single week at big accounts. So we are just making sure -- so the portfolio of opportunity becomes even wider so that if there is a couple of bad news come, that's the way it is, it will always happen, and we are going to still be able to benefit from being clinical today.

Got it. Maybe I'll pause there, see if anyone may have any kind of higher-level macro questions before we dive into some other pieces. Okay. Maybe just one more macro question and Jason, it might be for both of you. But if you want to give Olivier a break. Just on 2025, obligatory, you haven't guided to 2025. We'll learn more on that next year. But I think you pointed to kind of low-double-digit growth next year. I think we're modeling 10% organic growth overall, call it, 12.5% ex COVID, if Repligen is outpacing the industry by 500 bps to 1,000, that would suggest industries may be growing mid- to high-single-digits next year. Do you think that's kind of a reasonable view for next year? Or outside of COVID, are there any other factors that would be kind of impacting Repligen specifically versus the industry.

Yes, I'll jump in and then Olivier, please. But -- so again, it's at with -- we've got about $11.5 million of COVID headwind. So that's the point that you made there, low-double digit ex that. But I think for us, the way we're looking at that framework for '25 today, it's -- this is what we see a line of sight to. And that '25 may still be -- maybe there's a little noisier around, okay, here's the market and then here's Repligen's growth above that, right? We see that we absolutely can grow above the market. But right now, we're giving you that framework with, okay, here's what we can see and have line of sight, momentum that we've had, all the green shoots and positive things that Olivier has been talking about. If the market drastically changes, right, between there, then we'll have to adjust and reflect, both up or the other direction.

Maybe one follow-up on that. The next couple of months, presumably people are finalizing budgets. Do you think you get -- do you get a lot more information, kind of in November, December that inform...

Yes, absolutely. Yes. So yes, we'll continue to finalize our budget. And then again, it's really then February. So you've got 3 solid months really before we're out with the guide and again, have a lot more information from what appears and the other folks in the industry are saying what they're seeing and then how we are relative to that. But I mean we feel like we still have the strong algorithm to grow above market. But right now, we're giving you that framework as to what we've got line of sight to.

The only thing I would add, Jacob, I've have been here exactly 14 months now. I mean if I compare to where the market was a year ago and where we are today, I mean, we see like a lot, a lot of improvement, for sure. There was a lot of question mark a year ago. There are still maybe a couple still remaining. But compared to where we were a year ago, I mean, the situation is totally different for sure.

Yes. So kind of pivoting over to the product portfolio. Olivier, you mentioned a lot of using Tony, and I think your word now too, a lot of goodness in the third quarter. But I think maybe the most interesting one is capital equipment picked up. So just maybe kind of broadly on the system strategy. How is that effort going? And how much of an opportunity is there to transition customers who've been using some of your really innovative products and having them adopt Repligen systems as well?

That's going to be my favorite question of the day, Jacob. So I say that just because I have to say for me, the successes we are encountering right now on the system size is a perfect image of the strategy Repligen had and how we can just change the market quite drastically. And so let me try to explain. So when we acquired the business called ARTeSYN about 4, 5 years ago or so, we loved the technology, but we realize like if we wanted to be successful, we really needed to upgrade the offering to be able to compete and gain market share. So we're spending probably the first 18 to 24 months in the plant, in R&D, to redesign some of the equipment, build a real state-of-the-art product portfolio. And we really started selling those, I would say, almost now 18, 24 months ago only. So when I joined indeed a year or a year and 2 months ago or so, I mean, we were just at the beginning of this cycle. And we could see we had traction, but we're still the early days. And then we, at the same time, as you know, we put in place the key account management team and people started to buy some of this equipment, test them, like them a lot. We added the FlowVPX, which is in-line protein concentration tool to our system coming from R&D as well. And now, I mean, it's unbelievable because I mean people are just knowing about the portfolio we have. They realize it is better than what they see somewhere else. And not only is like the system themselves, but with the tool, this FlowVPX tool we have on it, they realize that that's becoming something they really want to have. And in fact, a lot of our competitors are asking us now, can we buy FlowVPX, put it on our own system and so on? So we've got great traction. So again, we are very small. We need to be humble here. I mean we are like gaining market share, obviously, because we start from nowhere more or less but we have a huge traction lately on this part of the business for sure. And then considering the market environment is challenging and we don't really see that because we are like gaining new stuff we didn't have before. We would think like we're in a really good spot here. And amongst all the different businesses we have, that is one where we have really a lot and a lot of ambition for the future for sure.

The other dynamic there, too, it's maybe even beyond just taking share, it's creating new markets, right? That's where the RS 10, the lab scale system comes in where oftentimes, customers have kind of created that homegrown, right? Or they've created a system and now we're coming in and saying, here, here's something that's automated that you can take. And so is that a new market, right, versus the market share. So that's the other dynamic that I think is happening.

Maybe a follow-up on that. I mean how much of some of these systems has been formed by what customers are asking for or doing?

Yes. No, it's -- I would say it's a mix. Thanks for bringing RS 10. Yes, I forgot that one. You're right, Jason. RS 10 is a perfect example why it came from customers. Basically, voice of customer. Guys, there is no small-scale TFF system capable of fulfilling our requirements for new modalities and you try to help us on that side. And we literally develop and launch that product in 15 months, which is quite unbelievable. I mean I don't think many companies are capable to be that fast to launch products. And the traction has been great. One thing I also didn't mention about the beauty of system is it's not a one-off sale. I mean we've got full stickiness on the consumables that go alongside. And now obviously, with this extended installed base, we start to have our own system, this is going to start to generate recurrent sales of consumables for the next 10 years or so, which is something we lost very much as well. And partly for RS 10, by the way, for new modalities, when you are selling system for large monoclonal antibodies, there is typically a lapse of about a year between the time you install the system and the time you start to see orders for consumable, for new modality it's much faster. In fact, the system are so small that the company who buys those systems, they plug them in their lab directly or manufacturing plant, they start using it within 2 to 3 months. So the one thing we love among others with RS 10 is we get a lot of consumable sales happening right after we sell the hardware as well.

So one follow-up that kind of struck me as we're sitting here. A piece of that consumable is the fluid management portfolio, and we got to see the new innovation center and -- the reality is a lot of these deals were during COVID, and I feel like there's some fog and we forget about all the things you bought. And then I think maybe it's further complicated by the fact that some of that fluid management stuff was -- there's probably some destocking dynamics around it. So maybe just talk about that portfolio and where it stands today? Like is that something that it's still early in implementing the system strategy. There's been some headwinds there. At some point, is that something that could come back as well?

Yes. So I would compartment probably the fluid management portfolio we have in 3 different buckets. So the first one is the one you mentioned, which is what goes directly alongside all of our system, full stickiness. So we need to continue selling our system successfully. And I didn't mention, but on the equipment side, our sales this year are high-single-digit year-to-date. So where the entire market is like, it's difficult, we win. In fact, we're seeing pretty nice traction here. But for that specific segment, any system we sell, we're going to see the recurrent sales of consumables, which are single-use consumable. The second bucket is the one we talked about earlier, which is more what we call components, which are more basic, there is still probably a bit of destocking happening. We start to see some improvement there, but that's probably is the subsegment of our fluid management that is that is still not growing very fast. And then the last piece, which is the other one we're very excited about is the new products we've developed and launched or we are going to launch very soon, which are bags, which are mixing bags, which are mixers, single-use mixers based on Metenova technology. This will be launched in quarter 1 of next year. We know that the mixing technology for Metenova is like the best in the industry and people who have been buying those stainless steel mixers from Metinova for the last 10 years or so, they are just waiting for us to be able to launch a single-use version. So that's also going to generate a recurrent sales of tax for the next 10 years as well. So that's something we are also very much looking forward to.

Got it. You mentioned ATF earlier. I think that was another bright spot in the quarter, up 50% year-over-year. You mentioned, I think, earlier this year dying late-stage commercial customers. And then last quarter, you mentioned a blockbuster customer that had adopted it. And I don't think you have revenue from that quite yet. How should we think the potential timing and magnitude of some of those customers and what commercial volumes could look like? And how easy or difficult is it to get ATFs pecked into an existing commercial therapy?

Yes, no, the reason why when I wrote a script for quarter 3 earnings, I thought we talked about those 9 projects we got design in late phase at our quarter 1 earnings. And then we didn't mention anything in quarter 2. So I need to at least tell our investors and friends that we are succeeding still designing in a lot of new products. And in fact, it's not only one. The reason why I mentioned that one in particular is because it's one of the top 10 biopharmaceutical drug. And obviously, when you have a technology like ATF, one of your big real focus are going to be those very big biopharmaceutical drug because as you can imagine, first of all, this is where most of the need is. I mean if you are a pharma company and you've got one of these gigantic monoclonal antibody drug instead of having to build 3 new plants that will cost you each USD 300 million to USD 400 million, if you can implement a technology like that, that will enable you to probably increase your yield and productivity so much that you can delay further investment, that's a big advantage. And obviously, for us, being designing in those big products will generate a lot of consumable sales. That's why we mentioned that one. This one, indeed, you're right, has not generated any sales yet. I mean, we are just starting to get some orders and most of the sales are going to start to kick in the next year. But yes, we are very focused on getting our ATF design in both early phases because we've got a beautiful XCell Lab that is a small-scale version, I think you've seen it in Arctic of ATF but also in the larger scale. And then this is where the regulatory story pops in. You're right, Jacob. And here, I mean, it depends from 1 pharma company to the other. Every company has got its own regulatory strategy. The beauty of ATF is not considered to be a very significant process change. I mean it's not like if you're changing a resin or cell culture media or whatever, you're just adding a loop into your upstream process. And so some customers seem to be able to get that approved in a very short period of time. Some other who are more careful will probably consider doing a refiling. We don't know exactly the details, but we've seen plenty of customers being able to implant very fast.

Got it. I've got a couple of other product questions. But Jason, I think one that I don't want to run out of time to touch on just as kind of the expense outlook. You've talked about the potential to drive 100 bps to 200 bps of gross margin expansion annually. I think that's potentially in play next year even due to some kind of unique dynamics around '24 numbers and the fee. But you're also pointing something similar on EBIT margins. And I think people kind of look at this and are like, shouldn't we see some operating leverage there. And so I think -- do you want to talk through the dynamics of the numbers? But I think maybe also kind of strategically, can you talk about the investments you are making right now in the commercial effort and elsewhere? And why do this now versus trying to maybe drive a little bit more margin expansion? And how should investors think about the ROI on those investments?

Yes. So a couple -- so you're right. So see that 100 to 200-point gross margin. And to your point, when we have wrapped up the impact of the restatement with some of the changing of the revenue timing, we ended up -- we're going to end up now '24, about 0.5 point higher, but yet still see 100 to 200 points. But at the operating margin level, we actually see 1 full point higher right, because of the COVID transaction. And I mean that's just pure leverage at the end of the day, right? Yet this 100% sort of income fall through. So that's why at that jump point, when we are talking, I'll say, 200 to 300 or whatever -- more than that 100 to 200 in the gross margin to [indiscernible] margin, that jump-up point has now gotten higher. So that's why from where we were, call it, 4 or 5 months ago, we're kind of at the same endpoint or the next point, it's just that, that expansion piece has changed. But to your point underneath that, though, is still looking at how we remain prudent in our spending but not being penny wise and pound foolish, right, in terms of the investments that we want to make. I mean you've seen that R&D is something this year that we've really I'll say, kept very tight. And so that's an area that -- I mean, everything we're talking about here today is a lot about new products that's got to come from our R&D and innovation. And so we want to make sure that we fund that for the long-term growth. And then to your point, the other area that we see still needs to get maybe an unfair share portion of investment is the S part of SG&A, right? And it's the commercial resources getting more coverage, we're finding there. It's kind of a mix of filling gaps of coverage that we have globally, technically. And then sometimes it may just be also bringing in high-caliber talent as well. Sometimes you pay more for that. And again, it's part of that return equation. So that's how we're thinking about the next year in terms of where there may be more investments, but still trying to drive some operating margin leverage. But I think, again, just from a year-over-year expansion, there's less of it given that baseline.

I've got one more, but I'll see if anybody from the audience has one. Maybe, Olivier, just to wrap up, maybe just one on process analytics. You talked about it some with the system strategy. I think makes a ton of sense. You hear the industry talk about continuous manufacturing and digital twins and blah, blah, blah, but it's kind of been a slower ramp than I think we would have expected a couple of years ago. But it also seems like maybe some traction now with the system strategy. So maybe how is that going? And then one follow-up from a comment earlier. I'm just curious, you mentioned competitors may be looking to leverage VPX. Does that increase the opportunity set in your mind? Or has it changed?

Yes. No, I'll start maybe with the last question here. We like it, obviously, from one hand because it seems like it's a really good technology, but we want to make sure, obviously, it's going to be helping in selling our system mostly on that side for sure. So yes, I think Tony and the team have been really focused on PAT. And what I like is that we only -- we didn't only talk about it. We just made it happening. Now we are really at a point where we need to keep on going on that side and adding probably 1 or 2 technologies there to make sure. And as you know, we are working on another one, which is a [indiscernible] technology that is taking a bit of time to develop because it's a beautiful technology, and we need to make sure we've got a state-of-the-art system to offer there, which we are working on. But yes, the PAT journey has been a great success for us, and we are still going to go in that direction for sure. And then if I just mentioned about the CTech business, this year has been probably a bit lower than we expected because that's probably the part of the portfolio where we are a bit in the same situation as a company like Agile and Waters are selling to kind of the same market segment and so on. And as you all know, this year has been a bit more challenging in terms of CapEx spending. We start to see a really nice recovery, I mean, particularly in quarter 3 and beyond. But this year has definitely been a little bit tougher.

Well, we'll leave it there. Olivier, Jason. Thanks for the time today.

Thank you so much. Thanks.

Thank you.