Repligen Corporation (RGEN) Earnings Call Transcript & Summary

I'm wrapping up the quarter for a lot of these sessions. As a kickoff, for Repligen, it was a good quarter. It was 18% organic growth. Each of the key product areas was up double digits. Op margins were 14.2%, down 70 bps and then you beat the streak by $0.05 on the bottom line.

Maybe just talk a little bit about what got you there and what you think about where the various components of the business are right now?

Yes. No, absolutely, Daniel. You're right. We are obviously very happy about our quarter 3 results. I mean, year-to-date non-COVID organic growth of 16%. So obviously, we are delighted about that. And what I think is really important is to figuring out we really have that broad and innovative portfolio of products. Sometimes people have a tendency to summarize our business in one single product line, but we are very diverse. And quarter 3 was a showcase here where really the 2 franchises that over delivered were analytics and protein and which was not completely expected to be very open here, but that was really a good surprise. And again, the breadth of our portfolio is a testimony of how we can grow faster than market. We've always said we want to grow more than 5% above market growth. And this year, we're probably going to be significantly above that. And then in terms of market segment, I mean, we know like biopharma recovered almost 1.5 years ago. CDMO probably about a year ago, what was really the good surprise of quarter 3 was small biotech, where for the first time in a long period of time, we had a really nice rebound, both in terms of sales, but even more in terms of orders. And then finally, I'd just say, really, I'm delighted by the commercial execution we have. I mean, Dan, like since I joined, I had a lot of focus on the big accounts and our key account management strategy. And I mean this is just working beyond our expectations. So yes, overall, very happy about the quarter.

Yes. The emerging biotech element of the mix was interesting. Can you just expand on that a little bit? Does that involve only pre-revenue biotech companies? How much of that was China? And what's going on over there with their own biotech development trajectory? I'd love to hear just a little bit more about what got you to this more encouraging position that you're in?

Yes. No, absolutely. So what we call emerging biotech for us are any biotech company that doesn't have a commercial product on the market yet. So for example, Sarepta would not be counted as an emerging biotech because they already have a commercial drug. So it's any company that doesn't have any commercial drug yet on the market. So obviously, we're trying always to understand why did this market segment did so well for us in quarter 3. And obviously, the easy answer could be, oh, funding has been much better because funding of biotech really went up to about USD 12 billion in quarter 3 versus I think $8.9 billion in quarter 2 and $8 billion in quarter 1. So great improvement on that side, but this is probably too early to say this is money going directly into those biotech companies that triggered some of the POs because typically, there is a 6-month lapse of time between the time they get funded and the time they spend the money. So we think there are probably a couple of other factors. And probably the biggest one is a lot of biotech companies have been acquired in the last 6 to 9 months in the U.S., and we have a specific example of a biotech with whom we've been working for several years on a specific custom resin. And as soon as they got acquired, we got a huge PO coming within the next 2 weeks or so. So I think there is definitely a lot of money entering into those biotech world via acquisition. And then hopefully, in the next few quarters, we're going to see some of this better funding also having an impact on further growth. But order intake was very high. So we are really pretty excited. We need to get confirmation over the next 2 to 3 quarters, and then we'll be able to celebrate more. And as far as China, I mean, it's not so much really biotech in China that triggered that growth we see on the small biotech side because in China, the biggest chunk of our business is really with a more established pharma company down there.

When everybody -- when emerging biotech took its downturn and everybody was trying to understand exposure levels, the way that you had framed things was to say that there was 10% to 11% of revenues coming from the small biotechs and then you had some additional exposure through CDMOs, probably on the order of 500 basis points. So it kind of got you to a mid-teens number as an emerging biotech exposure level. Is that still the way that you would characterize things?

No, it's lower than that, Dan, for sure. So if you just exclude CDMOs for a while, I mean, our exposure to those small biotech segment is below 10%. Our sales in quarter 3 were exactly 9% to that segment. And then the CDMO bucket is a little bit more difficult to figuring out because you don't really know exactly what type of customers those small biotech have. But I would have probably a couple, maybe maximum 3 points of business coming from small CDMOs going into small biotech. So if you aggregate the 2 together, it's less than 15%. I would see it more around the 11%, 12% range at this stage.

Okay. Maybe just thinking a little bit about some of the business areas or the product areas. Filtration, when I think about where your commentary has consistently sounded good, it's on ATF for sure. That sounds like a product line that's doing very well and has done well for you. And the filtration outlook for the year is 10% to 12%, but it actually went from the middle of 10% to 12%, which is obviously 11% to closer to the back end of the range. So those 2 ideas seemingly are moving in opposite directions. Can you just maybe clarify your outlook for filtration this year? And then I guess the natural next question would be, how do you think ATF does going forward? And what can filtration grow at going forward?

Yes. So if you allow me, I'll start by being very positive on saying it's amazing to see we've been able to raise guidance twice within the filtration now going more towards the lower end of the range, meaning like the 3 other franchises have been doing extremely well for us. And again, the showcase in quarter 3 was really analytics and protein. But back to filtration and before answering about the 10% instead of 11% if you think about 2024, where we had still about $11.5 million of COVID sales, plus the headwind we are facing right now with that specific gene therapy program, the 10% growth this year on filtration is really more around 15% to 16%. So I think it's important to ground people with that because the filtration business is doing very well. So now to the point about why 11% to 10% within the filtration portfolio, we've got the fluid management business that is included there. And we've had incredible traction this year in terms of order intake. And we were hoping to probably mid of summer time that we would be able to get more products out of our plants to be delivered in quarter 4. And unfortunately, the increase has been so huge like our plants are running a little bit behind, and we had to inform a few of our customers that some of the deliveries that we are planning to do around November, December are going to be more happening towards January, February. So the real only reason why we moved from 11% to 10% for Filtration is just a delay of supply of some of these orders we got now for the last 6 months in fluid management that are going to be delivered in the first quarter of 2026.

It is a pretty classic analyst thing to do to pick the 1 out of 4 businesses that doesn't have a [indiscernible] increase and focus on that one. So let's talk about some of the other ones. Chrome is having a standout year this year. What do you attribute that to? And then when we think about this mix to our point on filtration, what is the likelihood that chrome ends up being the faster-growing segment between the 2?

I don't know. This year has been beyond our expectation on chrome. And let's take a step back. Last year was probably, if I had one franchise I was not very happy about last year was chrome. So we made quite a couple of changes in terms of organization there, both from a commercial, but from a product management point of view as well. And now we have a team that is really focused on grabbing more of these big pharma customers. Historically, we've had a lot of traction with CDMOs, but it has been more complex to convince big pharma company to switch to prepacked column. And this year, we managed to convince 2 of these big pharma companies to switch. So that's a great news. The less positive news is very often when we start entering into a new relationship on the prepacked column, we have to take care of buying the resin for a certain period of time, typically 1 to 2 years, and this has some dilutive effect on -- from a margin point of view. So where are our sweet spot? If you look at the entire chrome business is to be anywhere between 20% and 25% of our sales on naked resin. This year, we are more towards the upper end of that range, where last year, we were below the lower end of that range. But that's an investment we're making, and we are so glad because now we've converted 2 big pharma company. And typically, this is for the long term, and we are going to be working with these guys for several -- the next several years here. But in terms of future growth, when we went through our strat plan in July, we came like with very similar growth across the 4 different franchises. There is literally only 2% difference between the lowest growth CAGR we have for the next 5 years and the highest we have. So it's really very cohesive across the entire portfolio.

Keeping it moving to proteins. That was an upside segment for the quarter. To what extent was the surprise for you related to just market demand versus maybe some of the things that you're doing with the new ligands that you're developing, the new resins that you've been developing, customers like Tantti, Purolite, et cetera?

Yes. I'd like people to really understand like we had to change our business model on protein almost 180 degrees over the last 3, 4 years, and big credit to Tantti and the team here is we started that exercise already a few years ago or so, but we really had to move from being a pure OEM partner to 2 or 3 companies to now having our own destiny in our own hands. And it all started with the acquisition of Avitide a few years ago, where it gave us access to developing custom or catalog ligands. And then with the acquisition of Tantti last year, now we've got the ability to develop full resin solution for customers. And I mean, there was a need on the market. I mean a lot of companies have been really waiting for a company like us to come and offer them those customization resin opportunities. And we've been really bombarded by demand on custom on one side. But at the same time, we're also developing our own catalog resin. So we launched a double-stranded RNA resin a year ago. We're going to launch 2 or 3 new resin by the end of this year, beginning of next year. So between catalog resins and custom program, we've had really a lot of great traction over the last several quarters. And if you look back this year, both quarter 1 and quarter 3, we had some really good surprises of customers to whom we indeed develop custom resins, one in quarter 1, one in quarter 3 where they came and say, "Hey, I want to order you a significant amount of that resin you develop for us, and we're going to use it right away." So I think it's still going to be lumpy probably for the next few quarters because we are just starting to have some of these custom resin projects happening, but we've done so many seeding over the last several quarters now that I'm really optimistic it's going to be a very nice growing business for us.

Do you think that could be a double-digit growing business for you more often than not?

Yes. No, absolutely. That's what we're aiming for. I mean think about the big picture of Repligen. We said we want to double the size of the company in the next 5 years. So that means a CAGR of about 15% across the board. And as I mentioned, every single franchise is going to be growing almost similarly. So it means, yes, it's going to be one of them double digit for sure.

Okay. Maybe we'll talk about new modalities. In my humble opinion, the first 6 months of the year and the conversation around Repligen were very much tied to just concerns over this class of drugs. Pfizer, Intellia, Biogen, Vertex exiting the AAV space, Sarepta had the issues that it did or does. And yet when we talk to you about the things that are going on in the business, your point is that ex-Sarepta, things sound -- ex the one gene therapy customer, I should say, things sound pretty good. So can you just sort of lay out the way that you see emerging modality demand today, excluding the very obvious partners for whom we've accounted for in the guide, et cetera?

You're absolutely right, Dan, I mean we got beaten up quite a bit about new modalities at least during the first half of the year. So now when I look back, I almost think it was a blessing for us in a way because we've been talking about that very diverse portfolio of products and us being across multiple modalities, and the fact that even though we had some headwinds this year, we managed to increase our guidance twice, both in quarter 2 and quarter 3 means indeed, we have that very diversified portfolio of customer and different type of application we're dealing with. And that's how we've been succeeding in the past. That's how we are going to succeed in the future as well. I mean we are not depending on one program and only one. I mean we're across a huge amount of different programs. So if your question is more specific about new modality, we are still absolutely very bullish about new modality. I mean, I'm absolutely convinced new modalities are going to be doing very well over the next 5 to 10 years. I mean, just look at the funnel of most big pharma company today. I mean, they still have almost 50% of their product in their funnel that are one of these new modality products. And then they realize like from a therapeutical point of view, they've got incredible potential and so on. So will there be some headwind sometime? Yes, probably, which is why, again, we need to be broad. So where we were mostly focused on AAV and -- sorry, gene therapy and mRNA in the past, I mean, this year, we've been much more focused on other new modality like cell therapy with a lot of wins in the last 6 to 12 months, but also antibody drug conjugate, which I know we're not counting yet as a new modality, but in a way, it's a new modality, and we have a really A to Z workflow of solution for antibody drug conjugate. So we're just making sure we are playing across the board and whatever our customers need from us, we are capable to turn around very fast innovation for those specific product line and so on. So yes, we're still very optimistic. And maybe demand is muted for us in the second half, might be muted partly next year because of the headwind we have on Sarepta. But considering the breadth of the portfolio we have, I mean, we are very confident about our future opportunity to grow.

Can you talk a little bit about cell therapy? It's the smaller portion of the CNG mix for you, but it does sound like you have appropriate products there, and it sounds like you're investing there. So how do you feel like that portfolio could evolve for you?

No, it's -- I mean, when you look at the funnel within new modalities, I mean, the richest funnel across the board right now is really on cell therapy. And what's funny having been in that industry for so many years now and so on is I've always mentioned about the 2 waves. I mean, back, what, 5 years, 10 years ago, suddenly people started to say, cell therapy will never make it and so on. But now we are reentering into the second phase, like the same happened with peptides, the same happened with antibody drug conjugate. And now gene therapy is more entering into the hangover period where probably the second phase will start again in a couple of years. So for us, specifically on cell therapy, we've had incredible traction on the ATF side because obviously, cell therapy, it's all about having the highest amount of cells in your bioreactor and ATF is the best technology for that. But also with the acquisition of 908, we acquired really what is the best PAT technology today to track cell therapy manufacturing with a product called MAVEN, and we also have a lot of traction on that side. And beyond those 2 product lines, we are absolutely looking at how to bring a broader portfolio of products offering on that side in the next few quarters for sure.

Okay. And maybe just -- I wasn't planning on getting too in the weeds on the technology, but lipid nanoparticles are something that when you read about where the field is increasingly going, you land on that. There are products, I think, in your portfolio that address the needs for those customers. Can you just sort of like make us feel okay about the idea that should product demand increase there, you will have the solutions that are necessary in order to keep doing what you want to do?

Yes. Thanks for bringing that one because I forgot to mention it earlier, indeed, Dan. So what we love about lipid nanoparticle beyond the fact the technology itself is absolutely brilliant is lipid nanoparticle can be used both in gene therapy, but also in mRNA technology as well and even in some -- a couple of others as well. So the application of LNP can be pretty broad and LNP require quite a broad range of bioprocessing component from filters, but also purification technologies and obviously, potentially some of the single-use component as well. So we are getting more and more asked to support customers specifically with workflow solution for the LNP network, and that's also another area where we think there is a lot of potential as well.

Okay. So the products that are appropriate for those partners -- for those customers are the same ones that...

Very similar, yes. But well, same one in terms of the big bucket filters, purification, consumable and then single-use component, but they might require specific innovation because the needs might be slightly different. So it's the same categories, but innovation will probably be of a sense here because people will have specific needs here.

Okay. Maybe thinking about onshoring and some of the things that are being talked about, certainly in the life sciences space, I think that's the reason that our group has a pulse right now. You've been one of the management teams to be willing to talk about 2026 being a year where we think some things could happen. It doesn't seem like it's going to dramatically change the picture for you next year, but there should be some bubbling activity. What do you have as far as expectations go for some of these sites being moved onshore, greenfield or brownfield activity leading to additional product demand?

Yes. So I'll take just a quick step back because I think maybe during our earnings call, I mentioned something that was maybe slightly confusing is we've gotten a lot of RFPs in the last 3 months, meaning a seat at the table to answer some of these very big RFPs, which we never saw before. And the reason is because our key account strategy has now enabled our big accounts to understand the breadth of the offering we have in terms of hardware offering and so on. But none of these 3 or 4 big RFPs we received in the last 3 months were linked to onshoring. Now talking about onshoring, yes, we do start to have some discussion with some of these companies who have got plans for onshoring in the U.S. And what we think is going to happen is probably big onshoring RFPs to be issued towards midyear 2026, maybe quarter 3 of 2026. And then depending on one company and the other and whether they've got an existing site or not, they might put some PO out as early as end of next year and to be delivered as early as beginning mid of 2027 or later if they have to build a brand-new site. But what I think is important, and we talked a little bit about it recently is the numbers that are being announced are probably a bit too high too inflated, but even if it's not USD 500 billion that have been announced overall, even if it's only USD 50 billion to USD 100 billion of investment, this is going to be a huge opportunity for bioprocessing company because you can imagine that probably about 10% to 20% of those amounts are going to go into equipment, and that's going to be a gigantic opportunity for bioprocessing company. We are very excited because, again, we have now a seat at the table that we didn't have a couple of years ago, and we are starting to be involved in all of these RFPs. So it's an exciting time for sure here.

Which product segment do you think ends up being the beneficiary of that first?

Well, for us, if you look at hardware today, it's really from ATF to mixers, which we've just launched beginning of this year, and we've got a lot of traction from a technology point of view with a lot of big accounts right now. And then it's going down to all of the downstream hardware from filtration, TFF system, including chromatography system as well. So it's a pretty broad portfolio of product for us right now.

Maybe talking about hardware, which we didn't sort of touch on explicitly. That revenue bucket was up 20% for you. Can you maybe just elaborate on what you're seeing out of that customer base? And then how you think the equipment funnel develops into the end of the year being in next year?

No, absolutely. We're seeing that segment definitely from a different angle than others for the reason I just mentioned. We are still kind of a newcomer. So when you are a newcomer, everything is kind of incremental, and we are still small. And so obviously, for us, it's easier to show greatness and show growth when you're coming with a much lower share than the other guy have and so on. This being said, I mean, I think we've got a very differentiated portfolio of products. And as you know, we are pairing our downstream system with our PAT technologies, which have got huge traction, so much traction that customers who have bought equipment from competitors are now asking us to install our PAT technologies on third-party equipment. So this is another reason why we are so confident about our ability to win a lot of market share. But it's fair to say the market overall has not gone back yet to full speed procurement of hardware, and we hope like these onshoring projects will be a real booster to see that market back to normal here.

In prior periods, when you see spikes or just increases in demand for hardware, are you able to see the consumables revenue increase a couple of quarters down the road and sort of point to that? Is that a dynamic that you feel is clear to you? And is that something that you would think we should expect going forward?

Yes. In that particular consumable bucket, it can be even faster than that, where there is a lapse of time for other consumable like cell culture media, resin, filters for specific consumable related to the equipment you're selling, you typically get orders very soon after you get the order for the equipment because people can't buy -- can't operate the plant without having the consumable. So imagine you buy a razor -- I mean, you're going to buy at least 2 sets of razor blade right away, otherwise, you just can't use it. So it's very similar in terms of single-use consumable flow pass, flow kits. Very often, people send you order at the same time as they sent orders for the hardware as well here.

Okay. Let's talk a little bit about margins. Jason is not here to defend himself, but I'm sure you'll be fine. The outlook for the company on an annual basis has been for 100 to 200 basis of op margin expansion per year. That was the way that the conversation took place in January, and it does not feel like we will get there this year, barring some dramatic fourth quarter performance. So the question is how -- but there are obvious reasons for that, right? I mean you have to invest in this business. You're up against 4 very large competitors. The portfolio is expanding. So when you and Jason think about op margin expansion as a philosophy, how much is it opportunities for op margin expansion if they sound the right way or we will deliver op margin expansion in a particular year? And is there a chance that, that evolves over the next year or 2?

No, absolutely. I mean, no, it's fair to say we've invested a lot in our business this year, and we've invested particularly in high-level talents because we needed it. And we realized like in order to scale the company and be able to run a double-sized company in the next few years, we needed to bring a little bit more horsepower, more experienced people who have had decades of experience in the industry and so on. So we've invested definitely quite a bit this year. If you really look from a pure organic OpEx growth this year, our organic OpEx growth is 14%, where our organic non-COVID growth is 16%. So we're still growing OpEx lower than -- organic OpEx lower than we grow top line. Next year, it's going to be down. We are aiming for probably 70% to maybe 75% of our top line growth in OpEx growth. And then it's fair to say like from 2027 onwards, this is going to drop significantly, maybe to the 50% level. So that's what we are aiming for. So we're going to start, I mean, it's fair to say like we probably have about 80% to 90% of the leaders we need. And when I say leaders, I'm not even talking about my direct report, but the level below. We still have a little bit of homework to do, but we've done a big chunk of it, which is why next year, we still believe it's going to be around 70% of top line growth, and then it will drop to 50% the year after, most probably.

Okay. So the point is that from an investment perspective in personnel and just hiring, you should have crossed the Rubicon on some of the -- on most of the important folks you need to hire and that tend to be expensive?

Exactly. That's exactly because whenever you're onboarding somebody with more experience, the price is a little bit higher, but also you have to take care of the people leaving at the same time, that's absolutely fair. But also remember, our target is really to be at 30% EBITDA by 2030, and we've got a good road map to be there, probably with an acceleration towards the latter part of the 5-year cycle, but definitely on the way to the 30% EBITDA margin. And then in terms of gross margin, we're aiming for the mid-50s in the next few years as well. And so we've got a good plan here for sure. And we are very focused on it, be sure about that, yes.

Okay. Rounding out the conversation as we get down to the last couple of minutes, I need to touch on China because it was a bit of an interesting situation in the quarter, just in the sense that we started the conversation with the drivers in the biotech space and orders, and generally speaking, the China biotech environment feels pretty good, but orders slowed for you a little bit in the quarter. Can you just maybe put that in context of comps? And then just what you think the trajectory for China looks like going forward based on what you're seeing?

Yes. No, absolutely. We had a very strong order intake in China in quarter 2, and we did mention at our earnings call in Q2 that we thought if there was one region where there might have been a little bit of inventory building that was China. So no big surprise that order went down in quarter 3. Obviously, sales went up in quarter 3. I really expect a significant rebound of China business for us in the second half of next year. I think we've almost now come to the point where we stabilized the business for us there. And I think we're going to start to see nice growth in the second half. We are very focused on implementing what I think is going to be a very unique strategy in China for China. And yes, we are very optimistic to be back to growth. I think this market is going to be one of the fastest biopharmaceutical market from probably second half of '26 onwards. I want to make sure we have a play down there because it's going to be a huge opportunity for the industry for sure.

And maybe with our last question, Olivier, I'll take it back to something that you mentioned with one of your first comments, which is that the difference between you and peers in terms of growth rates is changing. The spread is widening in a way that it really hasn't in the past. What would you attribute that to?

Yes. No, it's a great question. I mean I still believe we are aiming for 5% above market growth in the midterm. So you're right. This year, we are probably a bit above. We will see how it plays out in the next few years. Obviously, we all know we've got that 200 basis point of headwind from that gene therapy program next year. But I think 5 points is an ambitious target enough, and we're going to keep on delivering that with our innovation and the fact like indeed 80% of our portfolio, we don't really have a competitor. But also keep in mind, we have a huge tailwind because of our clinical exposure as well. I mean, we started the year with only 35% of our business being commercial. Probably we're going to land somewhere around 40% at the end of this year. But versus the big guys who are typically 75%, even sometimes more commercial, I mean, being in clinical gives you a huge tailwind because every time a project moves from one phase to the other, you see almost a doubling of demand. So that's the reason why we still feel like the 5% above market growth is a very achievable target for us.

Okay. I'm going to leave it there. Olivier, I appreciate you spending the time with us. Thank you.

Pleasure. Thanks, Dan. Thank you.