Repligen Corporation (RGEN) Earnings Call Transcript & Summary

All right. Good afternoon, everybody. I am Doug Schenkel with Wolfe Research. It's my pleasure to welcome Jason Garland, Chief Financial Officer of Repligen; as well as Steven Chehames from Investor Relations. Thanks to you both for being here.

Thank you.

So Repligen is, as everybody in the room knows, but just in case, Repligen is really one of the only publicly traded pure-play bioprocessing companies available to invest in. And the company not only stands out for that reason, but there's just a tremendous history of innovation, tuck-in acquisitions that feed into that innovation, which together has fed consistent above market growth, so we appreciate you both being here. In terms of the agenda, I thought we would spend a couple of minutes just recapping some loose ends from Q3. It feels like that was a while ago now, but it wasn't -- I guess it wasn't that long. But -- so maybe a few things to talk about just in terms of -- I think things that might be helpful to double-click on as we think about momentum into next year. With that in mind, then I actually want to talk about the framework for next year, which I think has got a lot of focus coming off of the Q3 call, which I bet you guys have heard here and now. And then I want to get into some longer-term growth drivers, so that obviously includes ATF, but we'll go beyond that as well.

Great. Excellent.

So Q3 revenue was -- you beat The Street by about $7 million. There was strength in analytics and proteins. Very quickly, how much of that was fundamentally just better than expected versus timing dynamics?

Yes. No, so first, you're right, it was a great quarter. We were up 18% organic. And underlying that, though, was really strength across the portfolio. So to your point, there's a couple of standouts I can talk about, but we saw strength across the franchises, across the regions, across our customer base. So really happy with the results. I think to your point, some of the beat on expectations were really driven by those 2 that you highlighted, the proteins business as well as analytics. I think with proteins, just think of it that can be lumpy, right? You can have just deliveries that hit all at once, that was primarily the driver there. So a little push and take within the year, but overall kind of a lumpy delivery that happened. Analytics, I think what we've seen is now a real strong momentum within our CTech piece. So again, if you remember as well, our 908 acquisition, the assets we bought from them are in that bucket as well. But the real strength was this momentum we're seeing on an upgrade cycle that we've started. So as a quick refresher: In our CTech analytics, this is our PAT technology, we do measurements in line, which we often connect to our filtration systems, downstream filtration systems. And then we have an at-line product, so you have to take a sample and measure. That product was, call it, 10-years-old-plus. And so we launched a new version. Think of it as the next version, more features, functionalities earlier in the year. And so we've been pushing that upgrade cycle and it caught quite a bit of positive momentum in the quarter, a little bit maybe higher than we had expected. Great news is we're in early innings, right? I mean we've got more than 2,000 units installed base. I think our calc is maybe we've covered 3% of the upgrades sort of to date. And so a lot of good runway on that as well. So I think to answer your question, some positive momentum there, a little bit timing more on the proteins piece and just again, the lumpiness that you can have across really the franchise, but really happy with the third quarter.

Equipment, which is about 20% of sales. I mean, we cover, I think, the full spectrum of bioprocessing companies. You're seeing strong consumable growth across the category. You're not seeing it almost anywhere on the equipment side. So to say you guys are outperforming the peer group with a quarter where I think you were up 20% on the equipment side is probably the understatement of the day. What's going on there? Like is it mostly ATF or is it broader than that?

So it's broader than that. And so again, if you think about our hardware, the equipment side, there's the downstream filtration systems. And I think we would say that though we've seen some positive momentum that it's still not back to where we'd hope or expect it to be. So maybe more consistent with the overall messaging you're hearing. What has really then helped pick up that whole group for us is ATF and then the analytics. So I mean, to close out the analytics, the same thing we just talked about, all of the momentum on the upgrade cycle, that would fall into our hardware bucket as well. Obviously, it's at a lower price point than many of the other equipment pieces, but still a positive lift. And then in addition to that, ATF. So when we sell ATF, there's certainly the single-use filtration cartridges, if you will, in those elements, but we also sell controllers with it. And so the controllers would be grouped within our hardware. And I think our view is that it's outside the economic cycle that some of the other hardware would be, right? If companies are thinking or pharma or CDMO are thinking about capacity expansions or those type of investments with some of the, hey, what's going on in the industry sort of question marks, you can dial that down, right? You might wait. But ATF, it's outside of that economic cycle. I mean -- and in fact, it actually supports that because in many cases, the decisions customers are making is I can invest in ATF and prevent the need to build a new line, right, or delay that need for a new line. And so -- and again -- and even if it's just a, I'll say, not a capacity decision, but just a yield or a faster output, again, that's an economic decision that is contained within that ATF purchase and not the broader. So I think that's why we've seen some sort of outpacing of overall hardware, kind of those 2 dynamics.

I'm going to ask a somewhat related follow-up. So you've done better in equipment hardware for the reasons you discussed. What we've seen more broadly is there's just been a lot of, we'll just call it, policy uncertainty, as we all know about, that's led to basically a freezing up of a lot of customer activity on the equipment side. As we hopefully move past that with the new MFN agreements and then really kind of to the crux of the question as we think about the possibility of reshoring leading to orders, again, correct me if I'm wrong, but maybe in '26 with revenue in '27 seems like the right way to think about it based on what we know now. You still get to participate in that even though you've been more resilient in a tough period...

Absolutely. Absolutely. I think a couple of dynamics. I mean, our downstream filtration systems are still in a place where we can take share, right, through the innovation we have, the differentiation, even connecting it to analytics. We now couple our in-line PAT technology within those systems as well. So we -- at least 1 in 4 get that as a part of that system. So there's a real differentiation there. So we've got just the underlying strength and momentum on that product set. But then beyond that, I think to your point, in the grand scheme of things, we haven't been around that long, right, as the company and the product portfolio that we have today. So when many of these originator drugs came out, we weren't there, right? So now...

Weren't in the game.

We weren't in the game. So now flash forward to where we are today, if you've got now new capacity being built through onshoring or other, you've got biosimilars, you've got next-gen originating drugs that are being developed, we now have a seat at the table. And again, that timing, coupled with what the team has done on our key account strategy that we've talked about, just being able to have more robust partnerships with key pharma, key CDMOs, bringing a larger portfolio. And now as -- again, to link it to the onshoring, now as those RFPs or discussions come up, we believe that we'll have a rightful place at the table to be able to compete, right, and through the RFP process and through that sort of next-gen process. And so we do think it will be a tailwind for us. We also believe another, I'll say, advantage we bring is that we can deliver almost all of our portfolio from U.S. production sites as well. So of course, that couples well with the concept of the onshoring. So we believe we're well positioned to participate in a strong way.

And maybe to state the obvious, but to the extent that reshoring is really reshoring where you're actually moving production that would have been done in a less expensive environment than the United States, some of the efficiencies you bring to the table are essentially very important to what you described in terms of gaining share opportunities.

Absolutely. I mean that's the commonality, I think, across our portfolio is the idea of providing efficiencies, either it's fast or higher yields or other cost savings measures, again, helps the onshoring to be more competitive. Absolutely.

All right. As long as I'm veering into policy dynamics, why do we close that out. So on, I guess, between MFN and reshoring and I would think the MFN agreements would lead to a more near-term change in behavior. Onshoring is going to take a little bit longer. One, do you agree? And then two, are you seeing a little bit of a change in tone of discussions with customers, as we've got a little bit more certainty out of Washington?

So I think you're right. We'll see some more of the onshoring opportunities probably a little later. I mean you said it earlier, and I'll just kind of confirm that we might expect some 2026 orders and then sales coming later. I think if in '27, if they're greenfield types of expansions, you might see some of that push out. I think to your point, MFN could happen a little quicker. Again, it's the same thing we just discussed that our products in general will help bring cost reductions and more efficiencies. And that's why, again, we think that we'll have the chance to compete and offer our value proposition, and that's really across the portfolio. And I think, again, that's what's much different today again versus the past, as we bring a much broader portfolio and can fill more of the workflow. And again, in a way where it's more valuable when you think about an MFN project or an onshoring that we can offer a bigger selection, they're going to want to spend time with us, right? They're just, "Oh, no, hey, we'll get to you later when we want to talk about ATF," right, that's a different discussion that brings us earlier to the table now.

It does seem like there's a little more momentum behind biosimilar initiatives in the U.S. That's a -- I think this is a quick answer, but that's a good guide for you guys for all the reasons we've talked about, correct?

Exactly. All the reasons. We went around when the originator maybe came out, and now we're here. And then the other thing I'd add though is, we also believe it might give us another swing on the originator next-gen because now they need to compete at a lower cost base with the biosimilar. So that's the other place where we feel like we could add value is helping the originator to be more efficient or cost efficient.

A lot of investors are speculating that the MFN agreements specific to Lilly and Novo are going to lead to lower pricing on GLP-1s and then higher volumes. I don't think you participate directly there. But to the extent that, that logic applies on the biologics side where maybe you get better pricing and that could lead to some pickup in volume, is that a potential good guide moving forward?

Yes. Absolutely. Absolutely. I think it's just the broader biosimilar that same concept, right, lower cost, higher volume. We do have some GLP-1, and we continue to determine are there ways that we can expand our exposure in there. But -- so we haven't lost sight of that as well.

Okay. Jumping back to the quarter, emerging biotech, it's only around 10% of revenue. But I think revenue was the highest in 3 years in the quarter. We've been waiting for some signs of life on the emerging side. How important was that?

Well, so we're encouraged to see it as well. I guess I'll -- it's a data point of one, right? So we'll see how the trend continues. I think coupled with just the performance in the quarter, we saw funding up significantly in September and I think we've seen it again, another big step up in October. So I think those as well or those dynamics on funding helped this. Now again, you're probably talking 6 to 9 months before that funding might translate to different orders that we'd see. But those couple of data points are absolutely encouraging for us. Again, it's 10% of the business, maybe a little bit more if you pull through some kind of Tier 2 CDMO work that might be in that. But again, it's just painting a more holistic sort of positive view of the portfolio. Because I would have said that kind of coming into the quarter, really the only 2 soft spots we've continued to see was emerging in China, right? And so again, it's an overall sort of good indicator for the industry.

All right. Let's talk a little bit about 2026. We've kind of gone there to some extent already, but let's talk specifically about guidance.

I haven't given it yet.

There. You want to do it now? No?

No.

Okay. I will say, I mean, it's obviously been a tough time for the group. I think a lot of us thought '25 was going to be a good year for the group as we move past some of the post-COVID era challenges. And I think that held up for about 2 weeks and then we got to February, where we heard a lot about the [indiscernible] dynamics. Then we got to Q3 earnings, and it was one company put out guidance and then it was kind of like, "Hey, hold my beer, I can go lower." And again, you guys didn't formally guide, but you talked about, listen, if the market is growing, the peer group is growing and correct me if I'm missing this up, but same goals? You guys expect to grow 5 more than that than the market and then you got a 2-point headwind due to 1 major customer, that takes you -- my math, not yours, I guess, technically 11 to 13. And I think that was a little bit below what I think some folks were looking for. It was -- maybe to use my clumsy way of putting it, but was this a little bit more of a hold-my-beer moment for Repligen than you intended?

Look, I think, again, I said we didn't give guidance because we've shared a framework, right? And you said it well, right, it's, hey, we, on average, have been able to grow 5 points above the market, expected to be able to do that in '26. And then to your point, 2 points of headwind from a specific customer to plus 3. I think what -- if you'd gone back to maybe the summer when we had shared some of this initial framework, I think the overall view of the market may have been more aligned with that 8 to 12 range, call it, 10 in the middle, right? Then I think to your point, third quarter came around, and we saw some other big players in the industry indicate more high single digits. And so again, that was just a starting point change for us. Here's a reality: When February comes and we do issue guidance, it will be on what we see, right? We'll have 2 to 3 more months of visibility from where we are today. We'll have better visibility for the year, and we'll share what our guidance is kind of agnostic to the market, right? Of course, still within our framework overall, but that's what we'll share. And what today is we're just kind of bouncing off of a baseline that we haven't necessarily changed with just the overall tone of the discussion.

No, it makes a lot of sense. It's just if I think about what we just described and then think about where we spent the first 10, 15 minutes of this, there's a lot of good going on right now, especially, even relative to the peer group.

No, fair. But again, if the overall industry does start to -- or doesn't go as high, then we're not immune to what the overall market is seeing, right? And we will still directionally be pushed one way or the other. And I say that's all we're acknowledging. And then we have our strategy and road map that allows us to beat that, and we'll execute it. And we'll be able to share more in February on how that kind of looks to what the rest of the industry is calling for '26.

That's helpful, and thanks for indulging in that. On the margin side, I thought all of this was helpful, but I think the key message is it's not going to be a straight line, right? So I think we have -- I think to some degree, with your help and your team's help, believe that, okay, you have about $1.2 billion in revenue capacity, if I'm trying to dumb it down for myself, as you get towards 80% capacity utilization, that's where the margins can move back to where we saw them a few years ago. But the important point is if that's a good basic framework to apply here, that doesn't mean it's going to move linear with revenue over the next 3 to 5 years. Is that right?

Yes. So I'd kind of say it this way, right? We've shared that we think that 5-ish years from now, we get close to that 30% EBITDA, right, and kind of back to high-ish 50s on the gross margin, right? I think the reality that I share is leverage that's more tied to that top line. You see that more at the EBITDA, right -- or EBIT op margin. And that's just by this equation of you grow your OpEx less than your top line, you will get leverage, right? And that's the way we're thinking about it. I think the gross margin gets some volume leverage, but not the same order of magnitude. And then price will help, right, low single-digit price that we get kind of year after year. And then having enough productivity through our factories and other initiatives we take to more than offset the inflation that we end up, right? You walk in every year and you've got your salaries up and you've got some other market inflation and between the productivity and the sourcing that has to wash or maybe net positive and then you get your volume fall through and you get a little bit of price. And that's the algorithm, right? And we see -- we've talked about maybe 100 to 200 basis points of gross margin kind of each year. And then I think if we grow -- or I think if we grow OpEx at a rate lower than top line, then we'll see even more leverage at the EBITDA or EBIT margin level. And I think the story on that, I think back to your point of the trajectory, is we believe that we still have some investment to make in our teams, our infrastructure, call it, our systems, the processes that we have in order to have sustainable growth, especially if we reach 1.2 or double the size of the business. And what took us from $100 million 10 years ago to today is different than what we need to sustain a much more -- right? Just think about the product portfolio we have today versus what we did. And even -- and we're having this discussion with some of the folks earlier about go to your COVID years, huge, huge volume, right, a lot of profitability, you had a small number of real products that you're selling, the simplicity of that. And so we just know -- and it's Olivier, it's myself, it's my peers and the team. We've all been at big companies, and we know the process structure that we need in order to do this right. And that's why we feel like '26 and probably even into '27, we're investing at a rate where that growth of OpEx is a little bit closer to the top line growth. And then I think as we get beyond that, we'll be able to maybe dial that down a little bit and accelerate in some of that scale. And I know people reading the transcripts can't see my fink hand, but it's -- and then spike up in the latter part of the year. So that's the way we're thinking about it. And for me, it's playing the long game, right? Yes, could we squeak out some more margin over the next couple of years, but at the risk of not having something that's robust to grow and grow going forward, I think that's the short game, and we're playing the long game on this one.

Yes. And to maybe put a little differently and in my words, I mean if you look at where the portfolio or how the portfolio has evolved organically and inorganically kind of seems like you've earned the right and frankly, as investors, we want you to do more of that.

Yes. Absolutely. That's great. Thank you.

So subsequent to the complement, a question, are there still some key areas where you think some investment is warranted to build out the menu?

Yes. And it's really across the board. Again, you bring in world-class leaders. And again, when you look at Olivier's staff and even our staff below that kind of that N minus 2, I mean, we brought in world-class leaders. They've all been industry experts, sometimes within industry in bigger companies, you bring in new leaders, well, they understand, well, here's where we're at, guys, here's where we need to go and here's some of the spend. And so it's really across the board. And -- but it's also this idea that we can make some spend now and then it doesn't just keep going, right? We are going to see synergies, efficiencies. You're going to really start to get the benefit of scale and leverage. I've been sharing with some investors that we primarily had external counsel for a lot of our legal spend, right? We've hired some several lawyers in-house. Yes, our expense this year is up. Next year, I'll actually be flat because now I can have pay internally versus -- but the great news is like I don't keep adding lawyers year after year after year, right? It's something -- and that's when you start to see that scaling sort of benefit. So that's the way we're thinking about it. It's across the board. And we've got, again, a leadership team that knows what good looks like and how to get there.

So that's what you described is it's broadening the team, it's bringing in new expertise. Even in the third quarter, I think there was some sort of one-off SG&A investment. So those are organic investments. I think historically, I'm sure there's years that are exceptions to this, but you've done 1 to 2 bolt-ons. Should we also expect that moving forward to continue?

Yes. So I mean we've done -- we did Tantti in December, we did 908 in February, we closed. So we're kind of in that space here for this year. Still very active in our pipeline for M&A. Again, we stand by our sort of criteria and philosophy that it's differentiated technology first. It's the ability to create synergy with that, with the existing portfolio. And then it's also then making sure the financials make sense. We've talked about some gaps in the mAbs workflow that are always of interest. And then, again, even beyond mAbs, new modalities brings a whole new sort of set of workflow and opportunities for us as well. And those become the places that we'll continue to watch. And we've got some dry powder and flexibility. So absolutely, we'll be -- continue to be active there.

And that's all part of the algorithm that gets you to double revenue in 5 years?

Yes. So we called out modest M&A, right? So if there's something bigger, then it kind of may expand that algorithm, but sort of modest M&A within that 5-year window, which is kind of more in line with your point, the bolt-on.

Yes. Maybe just with the 2 or 3 minutes we have left, we can do a little bit of ATF modeling cleanup.

Sure. Let me get to my expert on this one.

You had the benefit of delivering ATF hardware for a large blockbuster in the third quarter. I don't think you've disclosed it, but our guess is that was about $4 million in revenue. Let's say, we're in the right neighborhood. How -- I guess, the dollar amount upfront doesn't matter as much in terms of where I'm going with this question. But like once the hardware is in place, how long does it take for you to start to see the consumables kick in?

Yes. It's a fair question. So we delivered the hardware in Q3. Just keep in mind, it still has to get installed, still has to be validated. So this is probably more on the longer project where we got the order a year ago. But you could probably expect consumables pull-through to start in the back half of 2026 for this program. Just to outline: So we gave a couple of figures, and this is for N minus 1 processes. If you get into a perfusion process, the economics get a little bit different. But in an N minus 1, you might be having 2 to 3 single-use ATF on the seed train bioreactor. Those single-use ATFs are probably in the mid-5 figures. You're running those per batch. And then there's an associated controller for those ATFs as well, which typically run in the low 6 figures. So at peak demand for a blockbuster, assuming ATF is implemented across all of the sites that's manufacturing that biological drug could be in the $15 million-plus. If it's just a regularly commercially approved drug, you're looking at peak volumes probably in that low to mid 7 figures on an annual run rate.

And in between, like you said, in the example we're using from Q3, there's very limited consumable revenue until really for the better part of a year. And then -- but you don't go right to 15, it's low single digits, gradually moving up to 15. Is that the right way to think about it?

Yes, that's fair because typically, they'll start ATF at one site and then they'll implement it across various sites that they're manufacturing that drug. So there is a ramp up, if you will.

Okay.

And there are some consumables you deliver, of course, when you sell the initial...

[indiscernible]

Right. Exactly. So then your replenishment has to eat through some of that as well.

Maybe the last one. I talked about the doubling revenue in 5 years and that's, I think, what happens if you grow 15% a year, I think that's where you end up. Is there a scenario where that could occur a year or 2 quicker based on some of the things we started talking about? Again, it's doubling revenue in 5 years is pretty good. But just to push you a little bit further, there's a lot that's going right, right now.

Yes, there's always going to be scenarios that I feel like that's the right way we should be driving the business. And again, we're playing the long game here. So if we make the right investments, we can do that in a controlled way and build a broader portfolio and a broad portfolio. And -- but yes, are there scenarios that could be better? Yes, we'll issue that when we give guidance.

Yes. Let's see what happens. All right, guys. Really appreciate the time. Super helpful. Thank you.

All right. Thanks a lot.

Thank you.