WALTHAM Feb 21, 2020 (Thomson StreetEvents) -- Edited Transcript of Repligen Corp earnings conference call or presentation Thursday, February 20, 2020 at 1:30:00pm GMT

* Anthony J. Hunt

Repligen Corporation - CEO, President, Director & Member of Scientific Advisory Board

* Jon K. Snodgres

* Sondra S. Newman

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst

H.C. Wainwright & Co, LLC, Research Division - Equity Research Associate

* Jacob K. Johnson

William Blair & Company L.L.C., Research Division - Partner & Healthcare Services Analyst

* Joseph P. Munda

Janney Montgomery Scott LLC, Research Division - MD, Head of Healthcare Research & Senior Equity Research Analyst

SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst

Good day, ladies and gentlemen, and welcome to the Repligen Corporation's Year-End and Fourth Quarter of 2019 Earnings Conference Call. My name is Rocco, and I will be your coordinator. (Operator Instructions) Please note, today's event is being recorded.

I would now like to turn the call over to your host for today's call, Sondra Newman, Global Head of Investor Relations for Repligen. Please go ahead.

Sondra S. Newman, Repligen Corporation - Senior Director of IR [2]

Great. Good morning, everyone. Thanks for joining our call today. On this call, we'll cover our financial results and business highlights for Repligen's fourth fiscal quarter and full year 2019, and we'll provide financial guidance for the year 2020. Our President and CEO, Tony Hunt, will cover business updates and our CFO, Jon Snodgres, will cover our financial results and guidance.

As a reminder, the forward-looking statements that we make during this call, including those regarding our business goals and expectations for financial performance of the company are subject to risks and uncertainties that may cause actual events or results to differ.

Additional information concerning risk factors is included in our annual report on Form 10-K, the current report on Form 8-K, which we filed today and other filings that we make with the Securities and Exchange Commission. Today's comments reflect our current views, which could change as a result of new information, future events or otherwise. And the company does not obligate or commit itself to update forward-looking statements, except as required by law.

During this call, we are providing non-GAAP results and guidance. Reconciliations of GAAP to non-GAAP financial measures are included in the press release that we issued this morning, which is posted to Repligen's website and on sec.gov. The non-GAAP figures in today's report include revenue growth at constant currency, gross profit and gross margin, operating expenses, including R&D and SG&A, operating income and operating margin, income tax expense, net income and earnings per share as well as EBITDA and adjusted EBITDA. These adjusted financial measures should not be viewed as an alternative to GAAP measures, but are intended to better enable investors to benchmark Repligen's current results against historical performance and the performance of peers.

Now I'll turn the call over to Tony Hunt.

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Anthony J. Hunt, Repligen Corporation - CEO, President, Director & Member of Scientific Advisory Board [3]

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Thank you, Sondra. Good morning, everyone, and welcome to our 2019 year-end update. We are delighted with the way we finished off the year with 21% organic growth in the fourth quarter, 33% organic growth for the full year and overall 2019 growth for the company, coming in at 39%. All 3 franchises accelerated in 2019 as we benefited from customers scaling up on mAb processes and new customers implementing our technologies, especially in the area of gene therapy, where we now have greater than 50 significant customers today and just as many smaller customers.

Throughout the year, our team continued to execute on our long-term growth strategy with M&A and R&D remaining at the core of our success.

In 2019, we completed our acquisition of C Technologies, establishing an important new vertical for the company in process analytics.

Our R&D team delivered TFDF filtration technology, a game-changing technology and harvest clarification, an area that has seen little innovation over the last 10 to 20 years. Supporting our growth strategy and operational investments in 2019, we completed a series of financings that leave us with over $500 million in cash at year-end and positions us well for the future.

Looking back at the year, there were 5 key drivers of growth. First, as I mentioned, we saw strong adoption of gene therapy accounts where we help to deliver yield and efficiency improvements in viral vector manufacturing. Gene therapy represented approximately 15% of our overall 2019 revenue with filtration products accounting for 60% and chromatography products accounting for 35% of sales into these accounts. We saw a fairly even split between CDMO and gene therapy developers at 52% and 48% of revenue, respectively. And with the strong base of core customers and differentiated technology, we are really well positioned for growth in gene therapy. Second, we saw increased adoption of our XCell ATF products in both N-1 seed train, a traditional perfusion applications. The expansion of ATF applications into fed-batch processes is a key growth driver for us as it is the catalyst for sustained long-term growth north of 20%.

Third, we saw significant uptick of our TFF systems portfolio where we put more focus on tying systems and consumables into targeted upstream and downstream applications. We made the decision 12 months ago to focus on building out systems for our TFF portfolio. And not only has this team delivered on more traditional UF/DF applications, but they've also delivered on the development and launch of TFDF technology and fed-batch harvest clarification.

Fourth, we saw accelerated adoption of our OPUS prepacked columns as CDMOs and pharma customers continue to scale and expand. Combined with new demand for OPUS and gene therapy, we delivered approximately 1,400 comps to our customer base in 2019, up from 700 comps in 2018.

To ensure our ability to stay ahead of demand, we made significant investments in 2019 and here again in 2020 to expand our capacity and resources at OPUS production. And finally, just the overall strength of the biologics market, where in the U.S. alone, 10 new mAbs and 2 gene therapy drugs were approved in 2019. With a rich pipeline of over 1,000 biological drug candidates, the expectations are high for strong growth in the years ahead.

Before jumping into the quarter, I also wanted to highlight some of our key accomplishments in 2019. Starting with C Technologies, which was our first acquisition in process analytics. During our 7 months of C Tech ownership in 2019, we focused our efforts on commercial expansion, R&D acceleration and building out the financial team and implementing public company processes at C Tech.

We successfully built our commercial team with 10 dedicated reps, we focused R&D efforts on accelerating next-gen FlowVPE, and we completed the build-out of the finance team. For the year, C Tech products contributed close to $16.4 million in revenue, right in line with our $16 million to $17 million projection. We look forward to seeing the impact of our new commercial team in 2020, where we expect C Technologies to generate approximately $32 million in revenue.

Moving now to R&D. 2019 was a year where we made significant progress. A key goal for us entering the year was to develop and launch TFDF technology. We did a very successful technical launch of the product in September, and then our systems team followed up with the development of benched-up and production scale systems, which will be launched here in Q1. We also made progress with our next-gen ATF controller, which is scheduled to launch in late Q1, early Q2. In addition, key products like SIUS gamma and next-gen ligands are reaching their final stages of product development and will soon be available in the marketplace. From a capacity and infrastructure standpoint, 2019 was a huge year for us. We increased our office capacity fivefold and have dedicated programs in place to expand again in 2020. Our operations team also expanded and centralized manufacturing of XCell ATF in Marlborough and completed the Phase I implementation of SAP. Financially, we were able to raise close to $500 million net through a series of equity and convertible debt financings, again, putting us in a strong position for future M&A.

So moving now to our Q4 results and full year 2019 performance. As reported today, we had a great quarter with $69.5 million in sales. The story of the quarter was our organic growth performance against difficult comps. Each of our proteins, filtration and chromatography franchises performed well and together delivered 20% plus organic growth in the quarter and 20%, 30% and 40% organic growth, respectively, for the year.

In filtration, our XCell ATF product line had a record year. Our customers scaled up into late stage trials, and we saw increased use of ATF and N-1 seed train applications, reflecting a broader application of the technology into fed-batch processes. Single-use ATF continued to perform well in 2019, with revenue growth of 45%. Our SIUS flat sheet TFF cassette business also had a very strong quarter and year, up over 25%. The story continues to be around new accounts and key wins in gene therapy applications. Our hollow fiber portfolio also had a good quarter in Europe, 30% with the robust demand for single-use flow paths, hollow fiber modules and KrosFlo systems. We expect that our hollow fiber business will have another strong year in 2020. And our overall filtration franchise will grow approximately 25%.

Moving to chromatography for our OPUS business finished up over 30% for the quarter and 50% for the year. The story in the quarter was the continued adoption of our prepacked column technology in CDMOs and gene therapy accounts, which now account for 20% of our OPUS revenue. In parallel, we were able to improve our lead times significantly by bringing 5 new production suites online in December. We also saw accelerating adoption to focus ATF columns, as customers put our technology into late-stage and commercial processes.

We expect continued momentum for OPUS in 2020 as our customers scale and expand. We expect our OPUS franchise to grow at or above 20%, with overall chromatography at 15% in 2020.

Our OEM proteins business performed well in Q4 and was up 20% for the full year, led by strengthened growth factors with 50% growth from ligands. As mentioned, throughout 2019, we expect GE to transition to in-house ligand manufacturing here in 2020, creating a $12 million to $13 million or 4% to 5% headwind for the company. We expect that NGL-Impact A ligand will continue to gain traction in the marketplace as customers implement this technology in early-stage clinical trials. So overall, we expect the company to grow at 14% to 18% in 2020, with organic growth in the 10% to 14% range.

We expect H2 to be stronger than H1 as some of the larger scale-up projects is in the second half of 2020. Unlike other companies, it will take a few more months to understand what the long-term impact might be on overall company performance from the coronavirus in China in fiscal year 2020. For quarter 1, there may be some shift in revenue into Q2 based on customer timing.

As we move into 2020, our strategic priorities will center on the following: new product launches with a focus on TFDF and ATF controllers, expanding our market presence in harvest clarification applications with TFDF technology, further expanding our market presence in gene therapy through our filtration and chromatography franchises; broadening the customer base and applications for C Technologies; implementing capacity expansion and operating margin improvement programs; and finally, evaluating M&A opportunities to supplement our organic growth.

In summary, we believe we are well positioned to gain further share by processing. We believe that the blueprint we've put in place over the last 5 years around building out a world-class commercial team, bringing disruptive technologies to market and supplementing our technology base with select M&As will be the catalyst for growth over the coming years. Also, based on the investments we've made in R&D over the last 3 years, we expect 2020 to be a milestone year for us in terms of product launches.

Before concluding, I wish to recognize our employees around the globe for their commitment and leadership in 2019. I also want to thank our loyal shareholders and customers for their parts in Repligen's success and we look forward to another strong year for the company and bioprocessing.

With that, I'll turn the call over to Jon for a more detailed financial report.

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Jon K. Snodgres, Repligen Corporation - CFO & Secretary [4]

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Thank you, Tony, and good morning, everyone. Today, we are reporting our financial results for the fourth quarter and full year 2019, as well as providing our financial guidance for the year 2020. Unless otherwise mentioned, all financial measures discussed reflect non-GAAP measures. As you've seen in our press release this morning, we delivered strong financial performance for both the fourth quarter and full year 2019. We had another strong quarter with revenues of $69.5 million, representing 34% reported growth and 21% organic growth. For full year 2019, we reported record revenue of $270.2 million. The year-over-year increase of $76 million represents 39% overall growth, including 2 points of foreign currency headwind and 33% organic growth, $16 million or 8% of our revenue growth was attributed to our June 2019 acquisition of C Technologies.

Operationally, we continue to prioritize key areas of investments in the company. In 2019, 7% of revenue supported R&D programs that continue to produce disruptive technologies, like our new TFDF platform that we launched in the second half of the year. We also made important capital investments in our manufacturing sites, with a significant portion of our spend dedicated to increasing overall production capacity and expanding and upgrading our IT systems and infrastructure.

Now to provide more insights into our overall financial performance. As Tony mentioned earlier, our direct-to-customer franchises continue to perform well. Our direct products represented 79% of the company's total revenue in the fourth quarter and 76% for the full year compared to 72% for full year 2018. On a regional basis, for the full year, pro forma direct product revenue growth was fairly consistent across regions, with approximately 30% growth in North America, Europe and Asia. For the full year 2019, Asia represented 16% of direct revenue, while Europe and North America accounted for 28% and 56%, respectively.

Now moving to our income statement. Fourth quarter adjusted gross profit was $39.8 million, representing an increase of $11.3 million or 40% over the fourth quarter of 2018. Our adjusted gross margin was 57.2% for the fourth quarter of 2019 compared to 54.8% for the same period in 2018. The 240 basis point improvement was driven by favorable OPUS column to resin mix in our chromatography franchise and by increased demand for growth factor products in our proteins franchise. Full year 2019 adjusted gross profit of $154.1 million reflects an increase of $45.9 million or 42% compared to the full year of 2018. Adjusted gross margin was 57% for the full year 2019 compared to 55.8% for 2018, with the 120 basis point increase, driven by overall sales volume leverage in our factories, our new C Technologies product line and favorable product mix, partially offset by investments in capacity and operations.

With respect to operating expenses. Adjusted research and development costs for the fourth quarter of 2019 were $4.9 million compared to $3 million for the fourth quarter of 2018. For the full year 2019, adjusted R&D expenses were $18.8 million compared to $15.7 million in 2018. Key drivers of the year-over-year increase were the timing of our C Technologies acquisition, investments in our next-generation filtration technologies, as well as continued investments in our ligand programs.

Overall, R&D expenses finished the year at 7% of revenue.

Adjusted SG&A for the fourth quarter of 2019 was $22.2 million compared to $14.4 million for the fourth quarter of 2018. Full year adjusted SG&A was $71.8 million in 2019 compared to $53.1 million in 2018. The year-over-year increase in adjusted SG&A was related to the timing of our C Technologies acquisition and the build-out of our process analytics commercial team, as well as expansions and enhancements of our facilities, IT systems and commercial team.

Now moving to adjusted earnings and EPS. In the fourth quarter of 2019, our adjusted operating income was $12.7 million, a 15% increase compared to $11.1 million reported in the fourth quarter of 2018. Our adjusted operating margin was 18.3% compared to 21.3% for the fourth quarter of 2018. Our operating costs during the fourth quarter of 2019 included approximately $1 million of nonrecurring expenses, mostly in IT and recruiting. For the full year of 2019, our adjusted operating income was $63.5 million, a 61% increase compared to $39.4 million for the full year of 2018.

Our 2019 full year adjusted operating margin was 23.5%, a 320 basis point improvement compared to 20.3% for the 2018 period, reflecting a strong year of growth and operational execution in our business.

Adjusted net income for the fourth quarter of 2019 was $10.8 million, an increase of 21% compared to $8.9 million in the same period in 2018. Full year 2019 adjusted net income was $52.5 million, an increase of 74% compared to $30.1 million for the full year 2018.

Adjusted EPS for the fourth quarter of 2019 increased to $0.20 per fully diluted share from $0.19 for the fourth quarter of 2018.

For the full year of 2019, adjusted EPS increased to $1.07, up 62% from $0.66 in 2018.

Our cash and cash equivalents, which are GAAP metrics, totaled $528.4 million at December 31, 2019. For full year 2019, we generated free cash flow of $44.1 million, inclusive of $67.2 million of operating cash flow, less $23.2 million of capital investments primarily related to our facility and capacity expansion projects and IT systems investments.

Now moving to 2020 full year guidance. Our GAAP to non-GAAP reconciliations for our 2020 financial guidance are included in the reconciliation tables in today's earnings press release. As previously mentioned, unless otherwise noted, all 2020 financial guidance discussed will be non-GAAP. Please also keep in mind that our 2020 guidance may be impacted by fluctuations in foreign exchange rates beyond our current projection of a net 0 impact on full year sales and does not include the potential impact of any new acquisitions that the company may pursue.

Today, we are setting our 2020 full year revenue guidance, a GAAP metric at $309 million to $319 million, reflecting growth in the range of 14% to 18% as reported and 10% to 14% on an organic basis. Our adjusted gross margin guidance for 2020 is 55% to 56%, which reflects the impacts of expected headwinds from lighter GE volumes and investments in our facilities, capacity, IT systems and staffing to support expected strength and long-term market demand and overall growth. Adjusted operating income is expected to be in the range of $70 million to $74 million, with adjusted operating margins in the range of 22% to 23% of revenue for the year.

We are expecting 2020 adjusted income tax expense of approximately 23% of adjusted pretax income, which anticipates impacts from strong international revenue growth in higher tax rate countries in Europe and Asia.

We are expecting full year 2020 adjusted net income in the range of $57 million to $60 million for the year, and adjusted EPS in the range of $1.07 to $1.12 per fully diluted share. Please note that our 2020 adjusted EPS guidance reflects a $0.09 dilution impact due to share count increases, primarily related to our 2019 financing activities.

Our guidance reflects an estimated 53.4 million fully diluted shares outstanding for the full year, an increase of approximately 4 million. Adjusted EBITDA is now expected to be in the range of $80 million to $84 million for the full year 2020, with depreciation and intangible amortization expense is expected to be approximately $10.5 million and $15.5 million, respectively.

The company again expects to invest an estimated $20 million to $22 million in 2020 for capital expenditures as we proceed with our build-out of our OPUS manufacturing facility in Breda, planned capacity expansions in our Massachusetts and California facilities and with continued investments in SAP.

We expect 2020 year-end cash and cash equivalents, a GAAP metric to be in the range of $580 million to $590 million, with our CapEx investments being fully funded by cash generation from our operations. As you can see, we've executed on another strong year of performance in 2019, including making substantial investments in the company as part of our 2-year plan to prepare us for continued long-term growth.

This completes our financial report, and I will now turn the call back to the operator to open the lines for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Today's first question comes from Dan Arias of Stifel.

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Daniel Anthony Arias, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [2]

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Maybe just to start on guidance. 32% organic is a pretty big year. So obviously, you have a tough comp there. When you look at the momentum that you're exiting 2019 with though, can you just talk about the approach to the 2020 outlook in terms of being conservative or not conservative? And then how you feel about just the shape of the business and the drivers that you have relative to this time last year when you guided to, I believe, 13% to 17% organic growth. So less than half of what you ended up doing?

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Anthony J. Hunt, Repligen Corporation - CEO, President, Director & Member of Scientific Advisory Board [3]

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Yes. Thanks, Dan. Yes, I think in general, we finished off the year. We had good momentum through the second half of the year. I think as we looked at 2020 guidance, I think it was important for us to really gauge what was going on in each of the businesses, right, in each of the divisions. So within chromatography and filtration, we feel pretty good about it. Our OPUS business came off a massive year last year, up over 50%. And our filtration product line also had a really, really big year. So we've got really difficult comps in 2020. We expect that our filtration franchise will grow 25%. We think that our OPUS franchise will grow 20% plus. Our proteins business is probably the main headwind that we have and so we know we have a 4% to 5% headwind going into 2020. So if you take our 10% to 14% guidance. And we didn't have that headwind, we would really be doing 14 -- 15% to 19%. So we think, actually, the guidance we're putting out there right now is very realistic. While we feel really good about our businesses, really good about our products, we think this is the right guidance for us.

To your second part of your question about last year where we guided mid-teens, and we came in at 30%. I think the piece that really surprised us last year was the proteins business, right? And we had guided down 5%, and it came in really, really strong. So if you take that out of the equation, it would really drop down the overall organic growth pretty significantly. So I think that was a big factor. I think the other factor last year is that no one really in the industry predicted how fast the gene therapy market was going to grow. And I think we all kind of missed that a little bit. And so that's kind of the explanation for last year.

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Daniel Anthony Arias, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [4]

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Yes. Okay. That's actually my second question. Just on gene therapy, is there some color you can give on just how you feel about the expansion and the evolution of that market in terms of new activity and the scale of our project work. And then I guess, along those lines, I mean, one of the things that it sounded like you were trying to stay grounded on last year was this idea that a lot of things went right in 2019 in that field. And that, that always doesn't happen, Phase I don't always go to Phase II, et cetera. So I guess the question is that sitting 2 months into the new year, how are you looking at things relative to the way that you would have hoped they would have been 6 to 12 months ago?

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Anthony J. Hunt, Repligen Corporation - CEO, President, Director & Member of Scientific Advisory Board [5]

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Yes. I think when you look at how we finished in Q4, the gene therapy customer base was again strong for us in terms of shipments, in terms of orders as we -- it's difficult for us to see much beyond the first half of the year. We know, as I said earlier in my prepared remarks that we know there are some significant scale-up programs that are happening in the second half of the year. But in general, we haven't seen any slowdown in gene therapy, and we're expecting gene therapy will drive -- will grow about 30% for us in 2020.

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Daniel Anthony Arias, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [6]

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Okay. It sounds like you've given the 3 questions here, so I'll take the opportunity. Maybe just on TFDF, that sounds like it's one of the more meaningful products in the portfolio these days. So what is the thought on just the industry coming around to the dual filtration benefit that you get there. My sense is that, that might take 1 year or 2 for that to ramp and be a material contributor. Is that the way that you're thinking about it? And then what does the runway look like if you wanted to look beyond just this year and into 2021 and 2022?

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Anthony J. Hunt, Repligen Corporation - CEO, President, Director & Member of Scientific Advisory Board [7]

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Yes, I think you have it spot on. The -- it's going to take a couple of years for TFDF to take off, but we've got a significant number of trials lined up here in Q1. We expect it will generate $1 million, $2 million in revenue for us this year. But every year, going forward, we expect that revenue will double. And so it's not one of those product lines that we expect to grow at 20%, 25%, 30%. We expect that over the next few years, this is a technology that's going to scale quickly. But obviously, we've to get through the trials, we've got to prove the technology. We've done that so far, but on a limited basis, and I think we're very confident that the technology is going to be a key technology for us. That said, I wouldn't underestimate the rest of the product launches that we're bringing to market this year. So we really are bringing innovation in ATF. We're bringing out the next-generation FlowVPE technology in the second half of the year. We've got new ligands coming through. We've got next-generation, SIUS gamma. Really feel this year is a key year for us in terms of product launches that will set us up really well for 2021 and beyond.

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Continued here:
Edited Transcript of RGEN earnings conference call or presentation 20-Feb-20 1:30pm GMT - Yahoo Finance

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