Repligen Corporation

Good day, ladies and gentlemen, and welcome to Repligen Corporation's first quarter 2021 earnings conference call. My name is Ailee, and I will be your coordinator. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. Please note this event is being recorded. Following the company's formal remarks, there will be a question and answer session. In order to accommodate all individuals who wish to ask questions, there will be a limit of two questions at a time. I would now like to turn the call over to your host for today's call, Sandra Newman, Head of Investor Relations for Repligen.

Thank you, Eileen. Good morning, everyone. We appreciate you joining us this morning in a busy season. We'll be covering today our financial results and business highlights for the three-month period ended March 31st, 2021. We'll also update our financial guidance for the current year, 2021. President and CEO Tony Hunt will cover business updates, and our CFO John Snodgrass 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 the financial performance of the company, are subject to risks and uncertainties that may cause actual events or results to differ. Additional information concerning risks related to our business is included in our annual report on Form 10-K, our quarterly report on Form 10-Q, the current report on Form 8-K, which we filed today, and other filings that we make with the SEC. Today's comments reflect management's current views, which could change as a result of new information, future events, or otherwise. 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. Non-GAAP figures in today's report include the following, 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 when evaluating investment opportunities. Now I'll turn the call over to Tony Hunt.

Thank you, Sandra, and good morning, everyone, and welcome to our Q1 earnings call. We are delighted with our performance in the first quarter of 2021, where a combination of accelerating demand from COVID accounts and robust demand for non-COVID business drove our overall performance. For the quarter, revenue was up 88% coming in at $142 million, with organic growth up 69% versus Q1 2020. COVID-related programs made up approximately 25% of our revenue and 46 points of our total growth. Revenue from acquisitions we made in 2020, including Artisan, accounted for over 14 points of overall growth. Finally, we were especially pleased by the performance of our base business, which accounted for 27 points of our growth and approximately 68% of our revenue, reflecting continued strong demand for our products. As noted in our February call, the strength in orders that we saw in Q4 last year carried over into 2021 with an exceptional quarter in orders, driving not only our revenue beat, but also our increased guidance. Orders for the quarter were up more than 150% versus prior year, with customers now planning out into the second half of this year. Based on these developments, we now expect to finish the year with revenues in the range of $565 to $590 million. We anticipate COVID vaccine and therapeutic programs will contribute approximately 25 to 27% of overall revenue, and our non-COVID-based business to grow at or above 20%. Before jumping into our quarterly results, I want to provide a progress update on our strategic initiatives for 2021. Our number one priority, as it has been for the last 12 plus months, is building out our capacity to support accelerating demand across all of our businesses. As you know, our industry is seeing unprecedented demand for bioprocessing products, so it's critical that we stay ahead of this curve. Our operations team has done an outstanding job over the last year, as we have more than doubled, and in some cases, tripled our capacity and output across many of our product lines. For example, our overall capacity in flat sheet cassettes and hollow fiber products has more than doubled in this time period. On the chromatography front, we are in the final stages of completing our expansion in Breda for Opus prepack columns, which will immediately add four suites for Opus production and an additional four fully built to support future capacity needs. We expect this facility to come online in early Q3, offering customers local production in Europe. Finally, we plan to invest $55 to $60 million in CapEx programs here in 2021, as we build out capacity for flow path assemblies, filtration and chromatography systems, and flat sheet and hollow fiber product lines. We expect many of these programs to be completed in the second half of this year through to mid 2022, securing manufacturing capability to support the company as we scale to our goal of a billion dollars in revenue by 2025. Our second initiative is around integrating Artisan, EMT, and NMS into Repligen. It's been a busy first four months for our team as we evaluated the commercial and operational needs of these businesses. We have made good progress on building out the commercial teams with the addition of sales talent to support both the chromatography infiltration systems that we gained through these acquisitions, as well as the significant component portfolios at these companies. Operationally, we focused on integrating EMT and Artisan Waterford, our two centers of excellence for flow path assemblies, and expanding manufacturing capacity across this network. All three acquisitions are tracking at or above our plan for 2021, with Artisan having a very good quarter for revenue and orders. We're very confident in our guidance of 33 to 36 million for Artisan here in 2021. Finally, one of the real benefits of doing these deals is that we now have critical mass on the fluid management side of bioprocessing and a sustainable consumable stream as we move further into chromatography and filtration workflows. Our third initiative is around new product launches. Again, a strong start to the year for us with the launch of our spike protein resin, single-use ATF lab controllers, and next generation FlowVPE, which is called FlowVPX. We are very encouraged by the initial reaction to these product launches, with strong orders and shipments for FlowVPX following the technical launch of the product, and a rapid acceleration in the number of evaluations for the spike resin by many of the leading players in protein-based vaccines. Finally, our fourth initiative is focused on traction and gene therapy. Our commercial and field applications team were busy in Q1, adding in 17 new accounts and delivering another quarter of very robust orders. With a strong order load, we are on track for another good year in gene therapy with expected growth in the range of 25 to 30%. So moving now to our quarterly performance. The story of the quarter with the continued strength of COVID vaccine accounts and the 31% base business growth for the non-COVID customer segment of our franchises. Order load, as noted earlier, was exceptionally strong, with our non-COVID accounts contributing approximately two-thirds of this overall demand. Infiltration of our overall business more than doubled with across-the-board strength for all our product lines. The demand for our ATF devices, flat-sheet cassettes, and hollow fiber modules continues to strengthen as COVID vaccine and therapeutic manufacturers scale up here in 2021, and MAB and gene therapy accounts continue to implement these technologies and clinical processes. For example, our ATF business doubled as we have a number of late stage customers scaling the technology into commercial processes, in addition to COVID wins where ATF is used to boost bioreactor yield. Finally, our filtration systems business had an outstanding quarter with key benchtop and process scale systems, including the artisan filtration portfolio, up over 100% pro forma. This reflects the differentiation we have in the marketplace with our hollow fiber portfolio, which is now even further differentiated with the addition of the artisan single-use system. Our filtration portfolio is also capturing new opportunities. For example, in CHO and gene therapy applications, we continue to be encouraged by the performance and the adoption of our tangential flow depth filtration technology, or TFDF, which is on track to double again here in 2021. In next generation COVID vaccines, our products are getting specified into upstream and downstream parts of the workflow. We expect any significant revenue impact from these activities to be seen in the second half of 2021 and into 2022. Given the overall strength in orders, and capacity projections for the year, we are raising our guidance for our filtration business, which we now expect to essentially double here in 2021. Moving to chromatography, our Opus prepack column business had an outstanding quarter on orders and a solid quarter on revenue, despite the limited availability of chromatography resins from suppliers in our industry. We expect that the resin delivery situation will improve as we go through the year as more capacity comes online. As mentioned earlier, We are very encouraged by the early evaluation results of her spike resin and expect we'll see a pickup in orders as we go through 2021. Overall, we still anticipate the chromatography franchise to grow in the range of 30 to 40% this year. Our OEM proteins business also performed well with strengthened ligands and growth factors. The momentum we observed in 2020 on ligands has carried over into this year with robust demand for our products from our key partners as the market demand for protein A resins remains high. For the year, we now expect proteins to grow in the range of 20 to 30%. Finally, our process analytics business had an excellent start to the year, up over 40% year on year. We're clearly seeing the impact of our global commercial team with over 50% of instruments and consumables sold coming from new accounts. We saw an uptick in demand in Q1 at many of the companies supporting COVID manufacturing as solo VPEs were implemented into the testing process for these drugs. Our expectations for this business remains very positive with anticipated growth at the high end of the range of 20 to 25%. So overall, we are off to an excellent start to the year with strong execution at an operational, financial, and strategic level. Our team remains focused on the key priorities, which is really namely capacity expansion to meet increased demand and thus minimize lead times the integration of Artisan, EMT, and NMS to expand our premier systems offering, the development and launch of differentiated new products, and winning new opportunities in the marketplace. We continue to be well positioned to attain our long-term growth targets, and we're optimistic about the future. Our performance would not be possible without our exceptional employee base. and we continue to bring new talent into the organization, and we expect to add 300 to 400 individuals during the first half of this year. Through the dedication and commitment of the entire Repligen team over the last 15 months, we've been able to deliver essential bioprocessing products and to build and prepare our operations for continued growth. We look forward to updating you on our progress through the year, and with that, I'll turn the call over to John for a financial update.

Thank you, Tony, and good morning, everyone. Today, we are reporting our financial results for the first quarter of 2021, as well as updating our financial guidance for the year. Unless otherwise mentioned, all financial measures discussed reflect adjusted non-GAAP measures. As you've seen in our press release this morning, we delivered record revenue and strong earnings growth for the first quarter of 2021, while continuing to see a significant order load. As Tony mentioned, our performance reflects COVID tailwinds, which accounted for approximately $35 million and about half of our revenue growth in the quarter. Strength in our base business, which was up 31%, along with nearly $11 million of incremental revenue from our 2020 acquisitions. We are benefiting from an acceleration in demand for our products in general and a healthy biologics market that continues to move towards more flexible and efficient biologics manufacturing processes. With product innovation and differentiation at our core, we continue to drive technology leadership in the first quarter through three new product launches that Tony discussed, through the integration of our most recent acquisitions that complement and broaden our systems and fluid management offerings, and through expanding the applications for our products into a larger set of drug modalities. With increased demand, we continue to focus on expanding our manufacturing capacity with a three plus year time horizon to support increasing adoption of Repligen branded consumables and systems. Now transitioning to our first quarter 2021 revenue commentary. On our top line, we realized record revenue of 142.8 million in the first quarter of 2021. As mentioned, this represents growth of 88% as reported and 69% organic growth. Within these figures, our reported growth includes a four-point tailwind from foreign exchange and a 14-point tailwind from our 2020 acquisitions. Overall COVID program revenues represented about 25% of our first quarter 2021 revenues. Supplementing our revenue growth, we continue to see excellent orders expansion across each of our four product franchises, with overall order growth exceeding 150% for the first quarter of 2021. As it relates to regional revenue growth for our direct products, in the first quarter, we continue to see excellent traction in Asia rest of the world with revenue growth of nearly 200%, led by the strength of our filtration products in China, Korea, and India. Our European and North American region also continue to perform very well with revenue growth of greater than 100% and 70% respectively. In terms of revenue composition for the first quarter of 2021, North America represented 46% of the company's direct product revenue, with Europe and Asia representing 32% and 22% respectively. Now moving down our income statement. First quarter 2021 adjusted gross profit ramped up to $84.8 million, a lift of $40.3 million, or 90%, compared to the first quarter of 2020. Adjusted gross margin expanded to 59.3% versus 58.5% reported in the same period in 2020. Gross margin expansion reflects volume leveraged from our increased sales more than offsetting additional human capital, higher facility costs, and higher depreciation from equipment and systems coming online, all aligned with our manufacturing capacity expansion programs. Next, we'll move down the P&L to adjusted operating expenses. First quarter of 2021, adjusted research and development expenses increased to $7.4 million for the first quarter of 2021. compared to 4.4 million in the same 2020 period. R&D dollars during the quarter were directed towards expanding our global R&D team, finalizing key product launches in our filtration, process analytics, and proteins ramp businesses, and continuing to invest in new product development programs. Adjusted first quarter 2021 SG&A expenses were 31.7 million, or 22% of revenue, compared to 21.8 million or 29% of revenue for the 2020 period. Our first quarter spend increase reflects the timing of our 2020 acquisitions, as well as investments in personnel, occupancy, and depreciation, all in support of our capacity and commercial expansion activities to enable us to secure both near and long-term growth opportunities. Now turning to adjusted earnings and EPS. Adjusted operating income was $45.7 million for the first quarter of 2021, an increase of $27.4 million, or 149%, compared to $18.3 million reported in the same 2020 period. Adjusted operating margin was 32% in the first quarter of 2021, an expansion of 790 basis points compared to 24.1% in the 2020 first quarter. First quarter adjusted operating margin expansion reflects the impact of strong volume leverage with our revenue growth accelerating faster than our capacity-related investments. First quarter adjusted net income was $38.8 million, representing an increase of $22 million, or 131%, versus $16.8 million in the 2020 period. In addition to our strong growth and operating performance, our first quarter adjusted net income benefited from a low adjusted income tax rate of 14.3% for the quarter related to the combined impacts from incentive stock transactions and US tax reform changes related to our US owned foreign operations. First quarter 2021 adjusted EPS increased to 68 cents per fully diluted share compared to 32 cents in the 2020 period. an increase of 37 cents, or 116%. Cash and cash equivalents, which are GAAP metrics, totaled $711 million at March 31, 2021. We'll now shift to our 2021 full-year guidance. Our GAAP to non-GAAP reconciliations for our 2021 financial guidance are included in the reconciliation tables in today's earnings press release. As previously mentioned, unless otherwise noted, all 2021 financial guidance discussed will be non-GAAP. Please also keep in mind that our 2021 guidance may be impacted by fluctuations in foreign exchange rates beyond our current projection of a 2% tailwind on full-year sales and does not include the potential impact of any future acquisitions that the company may pursue. In acknowledgment of the continuing strength of the bioprocessing market and our strong operational execution, we are increasing our 2021 full-year revenue guidance, the GAP metric, by $65 million at midpoint, up to $565 to $590 million. This represents reported growth in the range of 54% to 61% and organic growth of 42% to 49%. We are maintaining our 2021 adjusted gross margin guidance at 57 to 58%. We are increasing our adjusted operating income expectations by 22 million at midpoint to a range of 156 to 162 million. Increasing our adjusted operating margin range by 100 basis points to a range of 27 to 28% of revenue for the year. We continue to expect adjusted other income and expense to be $1 million of expense relating to cash interest expense from our convertible notes. Based on our realized first quarter of the year benefits from U.S. tax reform and stock compensation, we are improving our expectation for 2021 adjusted income tax expense to be approximately 19% of adjusted pre-tax income. This guidance assumes an effective rate of 22% for the second through fourth quarters of the year and does not consider the potential impact of additional employee stock transactions, which we expect to be lighter for the remainder of the year. We are increasing our full year 2021 adjusted income net income expectations by 19.5 million at midpoint to be in the range of 126 to 130 million. And we are increasing our adjusted EPS expectations by 34 to 35 cents at midpoint to a range of $2.21 to $2.28 per fully diluted share. Our adjusted EPS guidance reflects an estimated 57 million weighted average fully diluted shares outstanding for the year. Adjusted EBITDA is now expected to be in the range of 175 to 181 million for 2021, with depreciation and intangible amortization expenses expected to be approximately $19 million and $21 million, respectively. The company continues to expect to invest $55 to $60 million into capital expenditures in 2021, inclusive of key capacity expansion initiatives for filtration, chromatography, and proteins portfolios, as well as continued SAP system implementation investments. We expect year-end cash and cash equivalents, a gap metric, to be in the range of $760 to $780 million, with our CapEx investments being fully funded by cash generation from our operations. This completes our financial report and guidance update, and we'll now turn the call back to the operator to open the lines for questions.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. Again, we ask that you limit yourself to two questions. To withdraw your question, please press star, then two. Our first question today comes from Julia Kim with JP Morgan.

Hi, good morning. Congrats on a strong quarter. So maybe starting with guidance on the COVID revenue expectations, could you help us understand what led to the increased revenue expectations? How much of that is the new spike protein ligand, and how much is maybe just new commercial production scale-up? And does guidance include the new capacity that's coming online in 3Q?

Yeah, great question, Julia. When you look at the increase in our COVID guidance, most of it is coming from the demand uptick that we're seeing for both commercial vaccines that we're in and for mid to late stage vaccines that are under development. So I think when you look back to where we were in February, we had many of the orders in for Q1 and into Q2. We've seen a lot more orders come in as we went through Q1, which is now going into the second half of the year and a little bit even into next year. So, you know, in terms of We're constantly adding capacity, so our guidance reflects where we believe we will be in capacity, but it doesn't reflect yet as we go through the year what happens in Q2, Q3, Q4 in terms of the demand curve.

Got it. Thank you. And then in the prepared remarks, you caught up some pretty strong traction for some key new products, including TFDF and the spike protein resins. So just wondering how much contribution from these new products do you see in the first quarter?

Oh, in the first quarter, it is still minimal compared to what we did, a few million dollars. That's basically what those products contribute in the first quarter. I really think that the benefit of the new products are what's going to happen in 2022 and beyond. It's great that we've launched these products, really happy with how FlowVPX is gaining traction in the marketplace. It's already been well-seeded with the FlowVPE technology being out there for two to three years. So I think the reaction to that product was really positive. As I said, on the spike resin, we're seeing a lot of evaluations going on. But as you may remember, In prior earnings calls, we've said that the opportunity for the spike resin is going to be in next-generation vaccines, and of course, it'll be for protein-based vaccines. And then finally, TFDF, I think we've been pretty clear that we believe that that technology and product will double every year for the next few years, and we're right on track this year to double.

Got it. Very helpful. Thank you, and congrats again.

Yeah, thank you.

Our next question comes from Dan Arias with Speedful.

Good morning, guys. Thanks for the questions here. Tony, a couple on gene therapy, if I could, maybe starting with sales activity. I know the difficulty there had been access for evaluations last year. Are you feeling like you're approaching or at a level where the ability to get in there and do a proper demo is now relatively unimpeded, or are you still working through that situation? And then as a follow-up, if I could – oh, go ahead. I'll just ask the first one. I was just going to ask as just sort of a follow-up on your comment about 17 new accounts in that area. I was wondering if you could help us with looking across the next 12 to 18 months in that market. Are you able to parse out how much of what you think you see comes from new project and trial work, so new business to you, versus progression of existing trial work? to the later stages versus marketed product demand?

Okay. Yeah, so maybe I'll start with the progression. I would say most of our growth will come from the accounts that have been seeded over the last few years. So it's not that we get into a single process at a gene therapy account. You know, like everybody else in bioprocessing, we're looking to get platforms. So you pick up new drugs as they come through the pipeline. So for sure, I think when you look at our top accounts, they continue to grow. They continue to expand. The idea with our commercial team, if you remember a year ago, we put a gene therapy go-to-market team in place. That team has done a tremendous job. They work with the salespeople. They work with the field applications folks. And that's what we focus on in terms of bringing new accounts online. We don't expect that those new accounts will add a tremendous amount of revenue in the first year, but it's all around seeding and keeping the funnel filled up. And I think from that perspective, I think we've done a good job. The second part of this is really around building out our gene therapy applications lab. So we're in the middle of doing that right now. So when we get into kind of late summer timeframe, we'll be up and running, fully functional. So that'll give us the balance of being able to work with key accounts, with top leaders in the space, but also be able to do our own gene therapy applications work here in Waltham at Repligen. The first part of the question, I believe, was around the gene therapy projections.

Access for evaluations, yeah.

Yeah, I would say that There's still some restrictions, but nothing like what we were dealing with in sort of Q2, Q3 last year. I think the field applications team, sales team, have really figured out a way to work with all our accounts. While it's not ideal, we're definitely doing evaluations, and we're making progress. And so our expectation is that we need to keep building the funnel with new opportunities. I think the challenge we have, and everybody in our industry has right now, is that when you look at the COVID demand, which is really strong, you have to balance the delivery of products to the COVID vaccine therapeutic accounts and also working with the non-COVID accounts to get product to them as well. So that's the idea of adding our extra capacity is that we're gonna be able to shorten lead times for the non-COVID accounts as well.

Okay. I know that was two, technically two, so apologies for slipping in a third here. But if I could, I just wanted to ask, I was reading about clinical trial progression and where these candidates in gene therapy are. And it looks like right now more than half of them are in phase two. This is cell and gene together, so it's not specific to the gene side where you are. But if we assume that it's close, do you think that that translates to sort of a surge in buying at some point? And are there capacity considerations there? Or is the expectation that things will sort of naturally space themselves out, so to speak, and so therefore it should be more steady over time?

Yeah, and this is just my opinion. I believe it'll be, you know, steady over time as opposed to a huge surge. But that's just where I'm at. And, you know, when I look at what's going on in the broader industry, there's clearly – CDMOs are working rapidly to expand capacity, which I think is a really good leading indicator. We're also, along with all our peers, everybody is building capacity. The capacity build-out is going to be not only for COVID vaccines, therapeutics, but it's going to also be very helpful as we look at MAD and gene therapy customers that want lead times that are much shorter than what the industry is providing right now.

Yeah, okay, great. Thanks, Tony.

Our next question comes from Jacob Johnson with Stevens, Inc.

Hey, guys. This is Mason on for Jacob. How's everyone doing?

Good.

Good. Just a few quick ones from me. On the gene therapy side, there seems to be a shift to using suspension for viral vectors versus the adherent processes. What opportunity does this present for your product portfolio?

Yeah, so definitely I think we've spoken about this a little over the last year or so. There is a move towards suspension cells. Obviously, when you look at the products that we have in our portfolio, whether it's the ATF technology or any perfiltration products or systems, it's going to be pretty well-suited to suspension cells. That's what we do in the MAB world. It's more scalable, and I think it's just a positive development for Repligen and for really many of the players in bioprocessing. So we just see it as positive.

Got it. And then proteins seem to be performing well. Any updated commentary on the Cytiva relationship going forward?

Yeah, no, proteins business, really, really good quarter. Honestly, the last couple of years have been very positive for that business, which comprises obviously of ligands and growth factors. Yeah, we continue to have our dialogue and conversations with Cytiva. I think there is a genuine interest in extending the current contract, and we're working through that process, and obviously we'll update people when that gets done.

Got it. Thanks, guys.

Our next question comes from Puneet Sudha with SBB LeRank.

Yeah, hi, Toni, John, thanks for taking the question. So obviously, first of all, you know, congrats on the really impressive quarter, and it's really great to see how you're contributing to being an important part of the COVID vaccines and therapeutics solution out there. So maybe on, you know, COVID was covered a little bit. So maybe if I could talk a little bit in terms of base business, what was the contribution in that base business from MABS versus gene therapy versus non-COVID vaccines that you could provide? Obviously, the really strong growth there too, but just wanted to see if you have any, if anything, if there's anything you can provide there.

Yeah, I don't have the split of MABS and gene therapy, but 25% of our beat in the quarter came from our non-COVID-based business. So I think that's a real positive. The things we're seeing, and it's across the board, it doesn't really matter whether it's MABS or it's gene therapy, but on our base business, what we're seeing right now is our proteins business has done has really overperformed in the first quarter. We're seeing opportunities where we have lead times that are shorter, where we can take some share or be able to deliver to accounts that really need product in a shorter period of time. Really happy with our analytics business. That's really accelerated again in Q1, which I think is very encouraging. And the yields we did last year, Artisan, EMT, NMS are all performing well, and, you know, we're building out that commercial team. So I look at it as really the whole portfolio. I don't really look at it as gene therapy versus MABS, but we're really happy with the over 30% growth for our base business in Q1. I think that's a reflection of the technologies we have. I think that's a reflection of our you know, the ability for our sales and field applications team to do a really good job with our customers.

Got it. Okay, that's helpful. And then, Tony, there's quite a bit of discussion about the booster shots, and how do you think about that opportunity longer term? Obviously, the number of these products usually gets specked in. So, you know, how should we think about the COVID opportunity, the COVID tail, and, you You know, what can vaccines be or what portion of revenue do you think vaccines can be as a mix of your revenue longer term, given the ramp up we're seeing here?

Yeah, that crystal ball answer is going to be really hard to give in terms of what percent long term. But I think it's pretty clear that, you know, the whole therapeutic vaccine part of COVID is going to be with us for a number of years, definitely into 2022 and more likely beyond that. you know, I read the same reports you do on booster shots. So if booster shots happen later this year, early next year, that's going to add increased demand. Annual vaccines, if that's a reality, obviously you can see how that adds to the overall, you know, demand cycle. And then on top of all that, you know, there's still a large percent of the global population that's not vaccinated, and we don't really know what way the variants are going to go. So a lot of A lot of unknowns. I think as we get into the second half of this year, it'll become a little clearer on 2022 and even on 2023 as well. But we expect that COVID is here for a number of years. It's going to be a driver of growth and it's a driver of growth for our whole industry.

Got it. And then last one, if I could squeeze in. In terms of the product portfolio, Tony, obviously you highlighted Artisan. Are there any other products that are doing remarkably well and part of the larger part of the pickup here with COVID? And on Artisan, was it mostly system sales or was there a good mix of systems and consumables that was part of the growth here in the quarter? Thank you.

Yeah, I think Artisan was a combination of systems and consumables. When you look at our overall portfolio, it's been really impressive that all our products are doing very well in the marketplace. Obviously, the filtration portfolio, when you see what our guidance is for the year where we expect filtration to essentially double, I think that tells you a lot about where we're winning. But that's not to say that our whole industry is doing incredibly well right now. So the demand is high. It's really around everybody's ability to produce and keep lead times at a reasonable level. That's what everybody in the industry is focused on. And when we look at where we're going as a company, I believe that the combination of the new products, the products we've launched over the last four or five years, we've firmly established ourselves as a technology player in the industry, and I think that's paying off for us. Great. Thank you.

Our next question comes from Paul Knight with KeyBank.

Good morning, Tony. Could you go over the CapEx numbers and where is that CapEx targeted? Is it for Opus?

Yeah, I'll have John walk you through that.

Yeah, I mean, the biggest piece of it, Paul, is really – and I'm not going to give specific numbers, but we're talking about $55 to $60 million. The biggest piece is going into the various filtration product lines for both flat sheet and hollow fiber, along with the flow paths businesses, including pretty significant investments we're making in the new acquisitions. And then there's a bit going into Opus. and there's a bit actually going into proteins as well for us to continue to maintain capacity there for expected higher amounts in the future. So those are kind of the big capacity-related programs. Of course, there's general maintenance as well. You know, that's probably a $10 million number to $15 million number a year. And then there's SAP, which is going to take another $5 million or so this year. So that program continues as well.

And then Tony, you've gone over a very robust internal set of products. Do you think your growth in the future now is shifting a bit toward internal projects, or is there still the same level of M&A opportunity out there?

Yeah, look, obviously the portfolio over the last seven years has expanded dramatically. You know, the projects that we can work and the programs we can work on from an R&D perspective perspective continues to grow and expand. So we have lots of ideas about what we want to do with the technologies that we have. But we also believe that for us to continue to compete in this industry, we still need to bring new technology in, whether it's through M&A or through the R&D efforts. So expect that we're going to continue to work through our continue to keep to the strategy we've put in place over the last five years on a go-forward basis.

Thanks.

Our next question comes from Matt Hewitt with Craig Hallam Capital Group.

Good morning. Congratulations on the strong quarter.

Thank you.

Maybe – Yeah, maybe a couple. So you've talked a little bit about the visibility into the second half, maybe even a little bit of next year, the lead times. It sounds like you're staying on top of those both from a capacity standpoint where you're making more investments as well as on the headcount side. I'm curious, as you look at those lead times, where are their potential pinch points? Is it more on your suppliers getting the products that you need? Is that the potential pinch point? And if so, you know, how are you working with your suppliers to make sure that they're in a position to help you kind of meet the demand that you're seeing?

Yeah, I think it's both, honestly. Clearly, we're working with our suppliers. I guarantee you everybody in bioprocessing is working with their suppliers. But you never know, right, as you go from quarter to quarter what unexpected supply issues crop up. You just have to manage through it. I think in general, the supplier side has been, you know, well managed. We've worked through any issues that need to get worked through. I think the internal capacity and lead times, you know, we've obviously for the last two years been building out and that's helped us a lot, honestly, second half of last year and first half of this year. But we also realized that we need to add more capacity and that's why we're spending the 55 to $60 million this year. And there'll be a significant spend next year as we had capacity in the second half of this year and we add capacity in 2022. And all of that puts us in a position to be able to support a billion dollar type company by 2025.

Understood, thanks. And then maybe one last one here. I think last quarter you commented that the vast majority of the COVID related demand that you're seeing was vaccines. Is that still the case or are there opportunities on the treatment side as well? And what kind of demand are you seeing from those customers? Thank you.

Yeah, on the therapeutic side, I would say it's similar to what we saw last year. We're in obviously a number of processes. But I think the vast, as you said, the vast majority of the revenue is coming from the vaccine side, and that hasn't changed.

Understood. Thank you.

Our next question comes from Ram Selvaraju with HC Wainwright.

Hi. Thanks very much for taking my questions, and congratulations on a very impressive quarter operationally. With respect to the vaccine outlook in the COVID-19 space, Two quick questions there first. Can you comment on the degree to which your vaccine solutions are likely to be applicable to vaccine technologies that may arise in the future that are not specifically reliant upon the spike protein? And secondly, I wanted to understand better to what extent you anticipate two factors potentially driving your business with regard to the COVID-19 vaccine related items. And those are in particular the need for vaccination campaigns to be accelerated dramatically in emerging countries, especially as we've been seeing, you know, surges running out of control in those areas where vaccine rollouts really have not happened to any great extent. And also in developed countries and particularly most notably in the United States, to what extent you expect the broadening of vaccine applicability to younger people, including children as young as now it seems 12, to have on the demand for your vaccine-related reagents? Thank you.

Yeah, so maybe start with the last question. I do think that the, especially in the developed countries, the campaigns that are going on to get people to vaccinate is really important. I think it's hard to put a number on what that means for demand. What we do honestly is we're really relying on the players that we're working with to give us the forecast of what they need. And that's kind of what we work to. And obviously we pay attention to what's going on in the news. But really it just comes down to what do the big vaccine manufacturers forecast out in terms of their needs, whether it's in the quarter, in the year, or in the following year. In terms of developing countries, I mean, we're a long way as a human race in terms of getting vaccines rolled out to all sort of developing countries. And I think that's something that obviously is going to happen more as we hit the second half of this year, and my guess is all the way through 2022. So that's something that everybody will be focused on. And again, we will rely on the companies and partners that we have in terms of forecasting out what the demand is going to be. To your first question, which was on the applicability of our technologies, to future vaccines that are non-COVID vaccines, but just vaccines in general. I think our portfolio of products are very well suited to any vaccine development work that's going on. I think our filtration portfolio, hollow fiber technology, has been historically used in vaccine manufacturing. So, you know, to the extent that we see more, you know, viral vector-based vaccines, mRNA-based vaccines, I think we're well positioned with our technologies to be able to operate in both upstream and downstream parts of that vaccine development work.

Great. And then on the gene therapy side, two questions there. Firstly, if we look at the emergence of specialized gene therapy CDMOs, I think, you know, in our research, we cited the case of this privately held entity called Forge Biologics. Clearly, we see those as being more potential customers for Repligen than potential competitors. But we were wondering to what extent you're seeing as these entrants in the CDMO space and gene therapy start to emerge, that's having any kind of impact on future demand for your gene therapy solutions. And then secondly, if you think that at any point in the future, any of these CDMO gene therapy businesses might be likely to try to compete with Repligen on any of the product offerings that you have, or if you think they're going to stay in their lane and you're going to stay in yours, and in point of fact, it's more a complementary relationship that you see developing in the future. Thank you.

Yeah, to your second question, you know, I don't know how that plays out. I think you know, if you look at, you know, historical data, CDMOs have tended to focus on working directly with customers and developing drugs, whether it's gene therapy or it's monoclonal antibodies. There aren't really that many examples of CDMOs who have become, you know, bioprocess technology players. So, again, I don't know how that plays out, and I don't think I can't really predict the future on that, but I think you can see what's happened in the past. In terms of companies like Forge Biologics, I think when you look at the gene therapy space, we've been working, Repligen's been working with CDMOs in the gene therapy space for the last three or four years. And I would say that the CDMOs have represented close to about 50% of the revenue that we have in gene therapy. So if other CDMOs jump in and start to manufacture, then we would see them as another opportunity to position technologies that we have. And I would imagine everybody else in our industry would look at it the same way. But I think the CDMO industry has been probably one of the biggest drivers of gene therapy growth over the last four or five years. So I fully expect that the addition of new CDMOs is only going to be viewed as positive.

Okay, and then just one last more general question. If you look at, strategically speaking, the impetus that COVID-19 has created for your business and how you think Repligen can best capitalize on this for the long term. Do you view this in terms of effectively broadening the scope of Repligen's offerings and expanding Repligen's customer base as this pertains specifically to vaccines and possibly also to certain segments of the therapeutics landscape that may have applicability in COVID-19 but may also have implications for future therapeutics down the line that are not related specifically to COVID? Or do you think that In point of fact, given that at least some of the COVID-19 related revenue strength may be transient in nature, you would look at this as possibly an opportunity that may give you the potential to pursue other strategic acquisitions or other strategic directions that don't have anything to do with COVID-19 or perhaps even vaccines in general. while you're able to make hay while the sun shines? And I understand that that's kind of a loaded question, but I think any perspective you can give us would be helpful.

Yeah, I don't think our strategy changes around how we compete and play in the bioprocessing market. So we've been doing the combination of M&A and launching new products, whether the new products come from an M&A that we've done a few years ago, or it's something that we've come up with internally and decided to develop ourselves. So I don't think COVID changes how we think about the overall strategy of the company with respect to the importance of M&A or the importance of R&D. In terms of how we think about the COVID opportunity and how it can broaden offerings for us down the road, To me, the most important part of being involved on the COVID front is there's a huge sense of purpose and pride within our company in terms of our ability to produce, deliver, and have a real impact with respect to these vaccines and therapeutics. The other piece that I think is longer term is the relationships that we develop with these manufacturers, whether it's, you know, pharmaceutical companies, biotech companies, CDMOs, because of the way the vaccines have been rolled out, there are many new players that we haven't worked with before that we get an opportunity to work with and form a really strong relationship. And we expect that those relationships will extend beyond what's going on with COVID today and that those are the future opportunities for us. So that's kind of how we view it.

Our next question comes from Brandon Cuiard with Jefferies.

Hey, thanks. Two-part question for John. You did 59% gross margins in the first quarter. You're kind of just maintaining guidance for the balance of the year. Why wouldn't we necessarily see more operating leverage on that line? And then any comment you can share with us in terms of the phasing of the expected COVID revenues over the next three quarters? Should we just assume it's rateable or not? maybe perhaps more front-end loaded than that.

Yeah, I'll let Tony cover the second one, but the first one in terms of the gross margin, yeah, we had a great quarter, 59.3%, and you're correct that we held guidance at 57 to 58. We have meaningful investments coming into the P&L in terms of headcount, in terms of depreciation expenses coming, in terms of facility expenses for added footprint that we've added. So that just really reflects the expected timing and when we expect those things to hit, aligned with the revenue coming through the P&L. Essentially, that's what we're seeing. I would say, you know, if you start to look at that range, we're probably edging towards the higher end, the mid to high end of that range, versus the lower end at this point in time. So there is some movement, but we're just kind of moving up within that range right now.

Yeah, and I think, Brandon, on the COVID revenue, it's probably going to be evenly spaced. If you just take the midpoint of our guidance and take out the $35 million, you'll see we're probably on the high end of $35 to $40 million in the next few quarters.

Gotcha. Good for me. Thank you.

This concludes our question and answer session. I'd like to turn the call back over to Tony Hunt for any closing remarks.

Great, thank you. Thanks to everybody for joining us today. Look forward to catching up in August when we'll bring you up to speed on the first half of the year performance. So again, thanks to everybody for joining.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.