Repligen Corporation

Good day, ladies and gentlemen, and welcome to the Repligen Corporation's fourth quarter of 2022 earnings conference call. My name is Chuck, and I'll be your coordinator. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. Please know that there will be a question and answer session following the company's formal remarks. In order to accommodate all individuals who wish to ask a question, there will be a limit of two questions at that time. I would now like to turn the call over to your host for today's call, Ms. Dondra Newman, head of investor relations for Repligen. Please go ahead, ma'am.

Thank you, Chuck, and welcome everyone to our fourth quarter and year end report. On this call, we'll cover business highlights and financial performance for the three and 12 month periods ended December 31st, 2022. We'll also provide financial guidance for the full year 2023. Repligen's President and CEO, Tony Hunt, and our CFO, John Snodgrass, will deliver our report and then we'll open the call up for Q&A. 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 quarterly reports on Form 10Q, our annual report on Form 10K, and the current report of Form 8K, which we are filing today, and other filings that we make with the Securities and Exchange Commission. 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're 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 our 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 our peers when evaluating investment opportunities. Now I'll turn the call over to Tony Hunt.

Thank you, Sandra. Good morning, everybody, and welcome to our 2022 year-end report. We are really pleased with the way the year played out, given the market dynamics in the bioprocessing industry, especially in the second half of the year, where we dealt with FX headwinds, changing order patterns, declining COVID vaccine demand and cost inflation. We finished the year at close to $802 million in revenue, driven by base business growth. Organically, our base business was up 35% in the quarter and 39% for the full year, while overall organic growth for the company was up 4% in the quarter and 22% for the year. Our Q4 sales were especially impressive given we essentially covered a $38 million drop in COVID-related revenue year over year with an increase in base revenue. For the year 2022, our overall business performance was outstanding, driven primarily by our filtration, and chromatography franchises, which were up 23% and 45% respectively. Within each of these franchises, our base business was up over 50%. Overall, our results demonstrate our ability to continue to differentiate ourselves in the bioprocessing market, which has allowed us to consistently grow above the market growth rate. As we progressed through the year, our product mix did change as COVID revenues declined and this became one of the major drivers of margin performance in the fourth quarter, which I will discuss in more detail later. Before moving into the discussion of our Q4 performance and outlook for 2023, I want to highlight some of our key accomplishments and our progress against our five strategic priorities in 2022. Priority number one was advancing innovation. Over the last few years, we have focused on increasing the pace of R&D product launches to build on our foundation of disruptive and innovative technologies. 2022 was no exception, with our R&D team delivering 10 new products during the year. We launched four artisan systems, three in filtration and one in chromatography, giving us a complete set of systems with low holdup volumes and a common software architecture. We are now well positioned to sell our filtration and chromatography consumables and flow paths with these systems, increasing the recurring consumable stream for the company. 2023 will be about optimizing this portfolio to meet the needs of the mRNA and cell and gene therapy markets. The R&D team also delivered on an exciting and first-to-market downstream system, which we launched into the market in Q4. The Crossflow KR2i RPM system, where RPM stands for real-time process management, gives customers the ability to measure, monitor and control drug concentration, not only in real time, but also in a fully automated way. We also leveraged our Avatide acquisition and developed and launched four affinity ligands and resins in 2022. Three focused on AAV viral vector purification, and one focused on monoclonal antibody fragment purification. Finally, we completed the technical launch of our next-generation large-scale GMP ATF controllers, providing our customers with a more automated solution for ATF applications. New products continue to have a very positive impact on our business. Products launched in 2021 and 2022 generated 7% of our revenues last year. We expect this number to jump to 14% here in 2023 for products launched since 2021. Our second priority was to build out our market presence in cell and gene therapy and mRNA. 2022 was a stellar year for us in cell and gene therapy. The business grew over 50% as our top accounts scaled and implemented Repligen technologies. We finished the year with well over 20 accounts generating greater than a million dollars in revenues and over 350 active cell and gene therapy accounts. We also made inroads in the mRNA market, building off the success we had in mRNA COVID vaccine manufacturing. Our portfolio is well positioned to capture share as this market grows and expands, and you can expect to see additional repligen products hitting the market here in 2023. An overall growth in cell and gene therapy of 15 to 20% coming off very tough comps in 2022. Our third priority, was to integrate and support our fluid management acquisitions. The fluid management acquisitions that we made in 2020 and 2021 are now fully integrated, with support coming from the build-out in 2022 of our assembly center in Hopkinton, Mass., and the build-out of our Waterford, Ireland site here in 2023. We now have a dedicated management and commercial team, a growing portfolio of fluid management products that are synergistic with our system strategy, and increasing awareness in the bioprocess community of our capabilities. We expect to build off the 30% organic growth we saw in the fourth quarter for Fluent Management and the 17% organic growth we saw for full year 2022, which was hampered by the destocking on the component side. We expect to deliver 20% plus growth in 2023. This revenue will continue to be recognized in our filtration franchise. A fourth priority in 2022 was to pursue M&A opportunities and strategic partnerships to expand our portfolios and markets. Following on the string of fluid management acquisitions, we signed two important strategic partnerships with DRS Daylight Solutions and PureLight, which is now an Ecolab company, last year. The DRS Daylight deal gives us another real-time in-line PAT technology that complements FlowVPX and puts Repligen in a leading position for advanced analytics in bioprocessing. The Purolite deal both extends our current partnership out through 2032 and expands our relationship to include new ligands developed by Avatide for MAP and MAP fragment markets. The resin products that combine our NGL ligands with the Purolite jetted bead technology continue to do well in the marketplace. The combination of our partnership with Purolite and the content generated through AvidSight and Navigo has helped us to transform our ligand strategy over the last five years. This puts us in a much stronger position to drive consistent high single digit growth in this portfolio once we get through the final phase of Cytiva reductions here in 2023. And finally, our fifth priority in 2022 was to complete capacity expansion at three key facilities. Our assembly center in Hopkinton was completed in June and fully qualified in September. This gives us an important foundation to support increased demand for our flow paths and assemblies in the market, ultimately supporting our system strategy with recurring consumable sales. We also expanded capacity for ATF, flat sheet cassettes, hollow fibers and systems that are Marlboro mass and Rancho California sites. It's been a key part of our business plan over the last three years to build out dual manufacturing capabilities that provide our customers with a robust business continuity plan. Over the last two years, we've increased our manufacturing capacity between three and nine-fold. We now have ample capacity for the next three to five years across the majority of our product lines. Here in 2023, we plan to complete the expansion of our Customer Application Center in Waltham and to bring our Waterford Assembly Center online further extending our dual manufacturing capabilities in fluid management. In addition, we are in the process of bringing additional ligand capacity online in Hopkinton and opening up a new facility in Estonia for our rapidly growing systems business. While our capacity investments will continue to impact our gross margins here in 2023 by 250 basis points, we believe it's important to have the Business Continuity Foundation in place as we pursue expanding our market share in bioprocessing. Shifting now from our 2022 priorities and moving to our Q4 and full-year business performance. As reported today, we had another strong quarter with base organic business up 35%, an overall growth of 4% despite the $30 million COVID challenge in the quarter. Within our franchises, our large-scale Opus chromatography comms, our filtration systems, our XLATF line and our fluid management products were the major drivers of growth in base business performance for the quarter. From a market perspective, sales into gene therapy accounts were up over 35% in the quarter and over 50% for the full year, reinforcing our position in this market. COVID-related revenues contributed approximately 13% to overall revenues in the quarter. COVID revenues were down approximately 20% sequentially from Q3 2022 and down 60% versus Q4 2021 as our main COVID vaccine customers lowered their demand. This ramp down in COVID demand in Q4 plus the increase in material costs and change in product mix where we had a lower contribution from proteins and filtration products and a much higher contribution from chromatography and food management products accounted for 450 basis points of the total decline in our gross margin. both sequentially and versus Q4 2021. For the year, COVID revenues were approximately 141 million, or 18% of our overall revenues. We expect COVID revenues to continue to ramp down in 2023 to a range of 30 to 40 million. The majority of COVID revenues are expected to be divided between the first and fourth quarters of 2023. Based on the anticipated drop of greater than 100 million in COVID revenues in 2023, along with the material cost inflation in manufacturing and the depreciation in occupancy costs associated with our new facilities, we will continue to see pressure on our gross margins. We do expect gross margins to recover somewhat from where we were in Q4 last year and are guiding now to a 53% midpoint for 2023. As our volumes increase and product mix shift to higher margin products, we'll expect gross margins to improve in the second half of 2023 and expand by 100 to 200 basis points in 2024. On the orders front, in the fourth quarter, total orders were down 15% while non-COVID business orders were up slightly versus Q4 2021. Sequentially, in Q4 versus Q3, base orders base business orders were also up slightly. However, we were very encouraged by some positive signs in the quarter. We had our strongest order quarter for pharma in 2022 in Q4, as customers specified our products into late-stage commercial processes. We also saw a 25% step up in orders at our gene therapy accounts versus Q3. For the full year, total orders were down about 10%, with base business orders up 15%. The areas where we continue to see order weakness is at the CDMOs and OEM customers. We saw some pickup in demand at the CDMOs in Q4, but this was offset by a weaker Q4 for ligands as Cytiva continues to ramp down their demand as anticipated, and the component side of fluid management business continues to work through elevated inventory levels that were built up during the pandemic. We believe that the order challenge is confined to CDMOs and OEMs, and that this will continue through the first half of 2023 with the expectation that we will move back to a growth mode in the second half of 2023. So moving now to franchise level performance, our chromatography business delivered outstanding growth up over 75% for the quarter and 45% for the full year. Growth was driven by increased demand for Opus prepack columns as resin availability improved, especially in the second half of 2022. We also saw Opus revenues and orders pick up significantly at cell and gene therapy accounts. Large-scale Opus sales into these accounts were up more than 80% in the fourth quarter versus the prior year period. Orders were also strong with Opus demand more than doubling versus Q4 of 2021. Although we saw a significant pickup in resin deliveries in the second half of 2022, the resin supply has softened here again in Q1 and remains tight. While resident lead times have come down versus 12 months ago, they are still elevated, which we expect will limit Opus growth in the first half of 2023. We expect supply to open up in the second half of the year as more capacity comes online. Overall, we expect growth for our chromatography business in 2023 for approximately 10%. Our proteins franchise had a lighter quarter in Q4, driven by decreased demand from Cytiva. The lower Cytiva volumes were partially offset by a strong demand for NGL ligands, which we supplied to Purolate. Overall, our proteins business was down 8% for the year, very much in line with our guidance through 2022. In 2023, we expect Cytiva demand to be down another 50%, which is in line with the contract we signed two years ago. We expect the lower revenues will be offset by strength in NGL ligand demand, growth factors, and our appetite family of AAV residents. Overall, we expect proteins growth in 2023 to be flat. Our filtration franchise was down 10% for the quarter as this franchise absorbed $34 million of the $38 million drop in COVID revenues year-on-year. However, base filtration business was up 38% for the quarter, driven by strength in systems, ATF, and hollow fiber consumables. ATF had a stellar quarter and year, driven by success in commercial processes and the continued focus on new account development. Our filtration systems business also has a strong quarter and year as we are seeing traction with the new artisan skids developed and launched in 2022. Other key highlights in the quarter included the launch of our Crossflow RS20 filtration system for gene therapy, along with the launch of our GMP large scale controllers for ATF. With an additional $100 million COVID challenge in 2023, We expect the filtration franchise to be down 4% to 12% overall, but up in the range of 10% to 20% for our base filtration business. Finally, our process analytics franchise had a softer quarter and relatively light year in 2022. In the quarter, we saw fewer year-end dollars for capital equipment versus prior years. Revenues for the year were up 11%. The pipeline of opportunities expanded in the fourth quarter And based on funnel strength, we expect 2023 growth to be in the range of 15 to 20% as we gain traction with our RPM platform and new products hit the market. In summary, we expect 2023 will be a challenging year for our industry as we all work through COVID headwinds and destocking challenges. Despite these challenges, I remain very optimistic about the bioprocessing industry and our position in the marketplace. Our investments support our commitment to stay ahead of demand and position ourselves to win share in new markets, including opportunities in mRNA, cell and gene therapy, biosimilars, and the MAPS market. Our customers are also optimistic and we believe that the level of investment in drug development and scale-out is high. I spent a significant amount of time in Q4 and here again in Q1 visiting accounts. Our customers are scaling, they're investing on multiple fronts, and it's confirming the overall robustness of the markets. As we look ahead, We expect our base business to deliver organic growth in the range of 12% to 16% in 2023, coming off 39% base organic business growth in 2022. As we move through 2023, our strategic priorities will center on the following. Launching new products with a focus on advanced analytics systems and filtration. Completing the build-out of our assembly center in Waterford and our application center in Waltham. making further inroads into mRNA and cell and gene therapy markets, and finally strategically managing key accounts so we can accelerate adoption of our technologies, especially in large pharma. We continue to be well positioned in bioprocessing and I expect a turnaround as we progress through the second half of 2023 with a much more robust year for our industry in 2024. I believe we have the right mix of differentiated products, the right business plan and team in place, to continue to win share and disrupt this industry. Now, I'd like to turn the call over to John for a report on our financial performance.

Thank you, Tony, and good day, everyone. Today, we are reporting our financial results for the fourth quarter 2022, as well as providing our financial guidance for the year 2023. Unless otherwise mentioned, all financial measures discussed reflect adjusted non-GAAP measures. As shared in our press release this morning, we delivered revenue of $186.8 million in the quarter and $801.5 million for the full year. The highlight once again was the continued strength of our base business, which grew by 35% organically in the fourth quarter and 39% organically for the full year. Within our base business, we saw continued strength in our gene and cell therapy business, which grew at 36% and 52% as reported for the fourth quarter and full year respectively, and represented between 14 and 15% of total revenue for the year. For the total business in the fourth quarter, organic revenue growth was 4%, and constant currency growth was 5%, or overall reported revenue was flat year over year. For the full year, organic growth was 22%, constant currency growth was 25%, and reported revenue growth was 20%. FX headwinds for the quarter and full year were slightly greater than $9 million and $33 million, respectively, reflecting a five-point headwind on reported growth for both periods. We expect these headwinds to remain through the first half of 2023, and overall, we expect foreign exchange to be a one-point headwind for the full year. Inorganic M&A had approximately one point of positive impact on reported growth for the fourth quarter and nearly three points of favorable impact for the full year. Digging deeper into our overall revenue performance, our 35% base business organic growth in the fourth quarter was essentially offset by reductions in COVID-related revenue of $38 million. For the full year period, the overall increase in base revenue of greater than $160 million more than offset the decline in COVID-related revenues of $49 million. As it relates to 2022 regional revenue growth, we had a strong overall growth year in Asia, North America, and Europe. For the full year, overall increases from Asia rest of the world increased by 29%, North America grew by 25%, and Europe grew by 10%, despite the significant COVID headwind in the region. Regarding overall revenue distribution by region for the full year 2022, Asia represented 20%, Europe represented 37%, and North America represented 43% of our global business. Now moving down our income statement. Adjusted gross profit in the fourth quarter of 2022 was 96.1 million, a reduction of 9.2 million, or 9%, compared to the same period in 2021. Adjusted gross margin of 51.5% in the quarter was down from 56.4% in the prior year fourth quarter. Gross profit and gross margin levels were impacted by multiple factors in the quarter, including lighter volume leverage on our factories, weakening foreign currencies, less favorable product mix, material cost inflation, and the impact of facilities and depreciation related to capacity expansions going live during the quarter. Of these multiple factors, the largest driver of the decline in gross margins was the change in product mix. where we saw a significant drop-off in hollow fiber filtration revenue directly related to COVID demand, and a decrease in protein A ligand sales due to lower Cytiva demand. Revenue declines in these product lines were partially offset by revenue gains from lower margin product lines like Opus prepack columns, fluid management assemblies, and systems. Adjusted gross profit for the full year 2022 finished at 456.9 million, an increase of 62.1 million, or 16%. An adjusted gross margin was 57%, representing a decrease of 190 basis points year over year. The factors highlighted as drivers for the fourth quarter performance are consistent for the full year. Now transitioning down the P&L to adjusted operating expenses. Adjusted research and development expenses for the fourth quarter and full year 2022 were 5.9% and 5.4% of total revenue respectively. In 2022, we launched 10 new products and we continue to differentiate our products with best in class technologies across our franchises. Adjusted SG&A expenses for the fourth quarter and full year 2022 were 23.5% and 22.6% of total revenue respectively. compared to the 22% level in the same 2021 periods. Year-over-year dollar increases are related to continued investments in their commercial team and expenses being realized from facilities and depreciation as our capacity expansions are going live to support our business for long-term growth. Now moving to adjusted earnings and EPS. Adjusted operating income for the fourth quarter of 2022 was 41.1 million. compared to $55.9 million in the fourth quarter of 2021. An adjusted operating margin in the fourth quarter of 2022 was 22%, compared to 30% in the fourth quarter of 2021. The reduced levels of operating income and margin are also related to the aforementioned product mix and inflation in the quarter. Adjusted operating income for the full year of 2022 was $232.2 million, an increase of 17 million or 8% compared to 2021. Adjusted operating margin for the full year 2022 finished at 29% compared to 32.1% in 2021. Factors highlighted in our gross margin commentary were partially offset by lighter operating expenses as we finished the year. Here in 2023, we plan to continue to invest in important product development programs and in commercial resources to support revenue growth, which has been paramount to our success over the last several years. At the same time, we are actively managing our operating expenses so that we can continue to deliver improving financial returns with operating margin gains as we progress through the year. Fourth quarter of 2022 adjusted net income was 39.1 million, a decrease of 7.8 million, or 17%, compared to the 2021 quarter. Adjusted net income for full year 2022 was $188.6 million, an increase of $13.3 million or 8% compared to 2021. Adjusted EPS for the fourth quarter of 2022 was $0.68 per fully diluted share, a decrease of $0.13 or 16% compared to $0.81 in the 2021 period. Adjusted fully diluted EPS for the full year of 2022 finished at $3.28, an increase of 22 cents or 7% compared to $3.06 for the 2021 full year period. As it relates to capital expenditures, the company invested $88 million in 2022, most significantly related to capacity expansion projects to provide business continuity and address our expectations for increasing demand. More specifically, 2022 included expansions of our hollow fiber, flat sheet, and systems manufacturing sites in Rancho, California, and Marlboro, Massachusetts. We also completed the build-out and validation of our fluid management assemblies facility in Hopkinton, Massachusetts. Other important capacity investments were related to our proteins business and continued investments in our SAP platforms. Our cash equivalents and short-term investments, which are GAAP metrics, totaled $623.8 million at December 31, 2022. We'll now transition to our 2023 full-year guidance. Our GAAP to non-GAAP reconciliations for our 2023 financial guidance are included in the reconciliation tables in today's earnings press releases. As previously mentioned, unless otherwise noted, all 2023 financial guidance discussed will be non-GAAP. Please also keep in mind that our 2023 guidance may be impacted by fluctuations in foreign exchange rates beyond our current projection of a 1% headwind on full-year sales and does not include the potential impact of any future acquisitions that the company may pursue. We are setting our 2023 full-year revenue guidance, a GAAP metric, 760 to 800 million, representing reported growth in the range of minus 5% to flat and organic growth of minus 4% to plus 1%. This revenue guidance includes base business revenue of 730 to 760 million, growing at 11 to 15% as reported and 12 to 16% organically. Our guidance also includes COVID-related revenues of 30 to 40 million, a year-over-year reduction of $106 million at midpoint. We are guiding our 2023 adjusted gross margin to the range of 52.5% to 53.5%, showing improvement from the Q4 2022 low of 51.5% and down 400 basis points at midpoint versus 2022. The gross margin headwinds that we experienced in Q4 will continue to impact us here in 2023. We have optimized our manufacturing expenses, which we expect will offset approximately 50% or 150 basis points of the product mix implications, leaving facility and depreciation costs as the major headwinds on margins in 2023 at approximately 250 basis points. We expect margins to improve with higher volumes as we move through the second half of 2023. and we expect to deliver further margin expansion of 100 to 200 basis points in 2024. We are setting adjusted operating income guidance in the range of 176 to 182 million. We are guiding adjusted operating margins in the range of 22.5 to 23.5% of sales. We expect the impact of product mix, material cost inflation, and facilities and depreciation to drive an approximate 600 basis point decline versus 2022. Optimization of manufacturing and operating expenses will offset approximately 25% of the product mix implications, leaving facility and depreciation costs as a significant headwind on operating margin in 2023 at approximately 300 basis points. Adjusted other income is expected to be $10 million of income for the year, and we expect 2023 adjusted income tax to be approximately 20% of adjusted pre-tax income. We are guiding adjusted net income to the range of $149 to $154 million, with adjusted EPS guidance in the range of $2.61 to $2.69 per fully diluted share. Our adjusted EPS guidance assumes 57.2 million weighted average fully diluted shares outstanding at year end 2023. Adjusted EBITDA is expected in the range of 213 to 219 million with depreciation and intangible amortization expenses expected to be approximately 36 million and 29.4 million respectively. Adjusted EBITDA margins are expected to continue to be strong a range of 27% to 28% for the year. Now shifting to capital expenditure plans, where we expect to spend $60 million in 2023, with a focus on four primary expansions projects, which Tony covered earlier. We expect year-end cash and cash equivalents, a gap metric, to be in the range of $670 to $680 million, with our CapEx investments again being funded by cash generation from our operations. This completes our financial report and guidance update. 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 one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. And to withdraw your question, please press star then two. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Jacob Johnson with Stevens. Please go ahead.

Hey, good morning. Maybe, Tony, just to start, you know, on the third quarter call last year, you talked about 16% to 20% base business growth. You're guiding the 12% to 16% this morning. Did anything kind of change in terms of the demand you're seeing or the end markets, or is this just building in some conservatism, and perhaps you could still end the year closer to that 16% to 20%?

Yeah, I would say that, you know, where we were in, you know, at our Q3 earnings call and where we were at the beginning of the year versus now, it's changed a little bit. And I think the main area where it's changed is in our chromatography business. So we were expecting much higher growth coming from chromatography in 2023 based on resin availability from the main players in our industry. That softened in Q1. It's actually softened over the last six to eight weeks. And it really has slowed down what we can do in the first half of the year because it's outside our control. We've had conversations. We know that capacity is coming on. Customers have to accept kind of manufacturing from the new facilities. And that's really probably the biggest driver in terms of the first half, slower traction on resident availability. But I would say, Jacob, I had to point to one thing. That's the difference between where we were in November and where we were in January versus where we are today.

Okay, thanks for that, Tony. And then just maybe on the process analytics side, I think that was a key focus at your investor day. It seems integral to the system strategy you have. And it seems like that's a real opportunity for you all over the next five years, but it does seem like it's a bit softer this quarter. So could you maybe kind of square the near-term performance there versus the long-term opportunity?

Yeah, love this business. You know, when you look at the funnel of opportunities that we have and the activity that we have in the marketplace, it's really high. The need for at-line, in-line technologies couldn't be any higher. So I just think that there's some conservatism at the customer level in terms of the dollars they want to spend and the approval process of getting everything kind of pushed through for approval on these capital equipment purchases. We like what we launched today. with the RPM system in Q4. We got some orders in December, which was very encouraging. We're doing a lot of demos of the technology. We think this is the foundation piece that allows our customers to go from benchtop care to eyes all the way up to our artisans skids using the technology from our analytics business to be a major differentiator versus other products that are in the marketplace. So, Well, yes, you know, last year was lower in terms of overall growth. I don't think it's that much different, Jacob, than a lot of other companies who have, you know, the analytical products, quality control products that are in the marketplace. And so I think it's a function of that. The other thing I would say about our analytics business is we don't, you know, that is orders that come in in the quarter are shipped in the quarter. So it's not like any of the other franchises where you might be operating two, three, four months ahead with an order book.

Got it. Thanks. Save the questions, Tony.

Thanks, Jacob. The next question will come from Dan Aries with Stifel. Please go ahead.

Morning, guys. Thanks for the questions. Tony, I know parsing through the quarters on an outlook is difficult, but just on the first half of the year versus the second half of the year split that you see right now for 23 Does the base case sort of assume some improvement in 2Q that lends evidence to the idea that the destocking phenomenon is subsiding and that resin availability is maybe getting better again? Or really, should we just be thinking about 1Q and 2Q similar with 3Q being the improvement quarter?

I personally think it's more Q3 improving. So second half of the year being better than the first half of the year. The piece, Dan, that I found really encouraging was that on our, when we looked at our pharma orders in Q4, right, it was highest quarter we had in orders in all of 2022 was in Q4 for pharma. You know, when you look at the book to bill, it was nicely over one. So that's actually really encouraging. And if you look at pharma for the year for Repligen, we were also over one on a book to bill. where we're, you know, the places where we see the challenges are at the CDMO level. So I think if the CDMOs begin to bounce back, and we definitely saw some improvement in Q4, but not enough for me to say, hey, that's going to, you know, how much does it continue Q1, Q2? So, you know, looking at it right now, I would say it's second half of the year stronger than the first half of the year. The other thing to remember is our COVID revenues are going to be pretty much in Q1, evenly split in Q1 and Q4 with very little revenue in Q2 and Q3. So base business, I would expect we would see orders definitely beginning to pick up in Q2. But I think from a revenue point of view, it's the second half of the year. Yeah. Okay.

Okay. And then, John, maybe on the out margin, 22.5 to 23.5, it feels like in order to land at the midpoint, of 23 you you should be or we should be thinking about a step down from 4q to 1q rather than being claddish as a jumping off point for the year which i think is you know maybe the way that you were describing things at the end of the year is that right and then you called out mix as a factor that also feels like it's a little bit of a deviation just given that it it felt like more of a volume thing and a leverage thing at the end of the year rather than a mixed a mixed phenomenon. So can you just add some color to the moving pieces at the margin line and then the flexibility that you might or might not have on cost and spending? Thanks so much.

Sure. Yeah, so I think that the first part of your question was around operating margins and kind of the stepping off point into 2023 from 2022. Yeah, I think we'll start on the kind of the lower end or slightly below guidance in Q1. And then we'll build on that as we move through the full year, getting back to that, you know, hopefully back to the midpoint of that range at 53%. But definitely, hopefully between that 52.5 and 53, or excuse me, 20, sorry, 22.5 and 23.5% level. So that's where I'd start it. If you look at the gross margin, I can give you a bit more color there, Dan. You know, it's really two overarching themes that we're looking at here. You know, the first one is, you know, the most significant here in the quarter, in the fourth quarter, which was material costs as a percentage of our overall revenue increasing. And I'll break that down a little bit further for you. And then also the higher facilities and depreciation costs that we're seeing related to our capacity expansions and business continuity work that we've been doing. You know, I'll give a kind of a comp, a sequential comp, Q3 22 to Q4 22. You know, we finished Q3 22 at 57%. Q4 22 is about 51 and a half percent. That's a decline of about 550 basis points. So when we break this down a little bit on the material cost side, cost inflation, you know, from materials coming from our suppliers, cost us about 150 basis points of market decline, Q3 to Q4, Dan. And then product mix, and volume was another decliner at about 300 basis points. So those were the two primary components, about 450 basis points on the overall material side. And then the facilities and depreciation-related costs were about 100 basis points of decline in the fourth quarter. So that gives you the breakdown.

Yeah, okay. Thanks very much, John.

Yep. The next question will come from Puni Sudha with SVB Securities. Please go ahead.

Hi, Tony. John, thanks for taking the questions. So first one, just given on the top line, John, wondering if you can provide us with the base business growth for the first quarter should be, not sure if I heard that. And then, do you still stand by your long-term base business ex-COVID growth of you know, 20% and 2027, 28, a revenue estimate of 2 billion.

Yeah, let me take that one, Puneet. I think, so long-term, absolutely, we believe in our company and our products and how we're doing in the market and how differentiated we are. I think, you know, 2023 is a unique year. Everybody in our industry has to kind of get through the year. And yeah, we don't have guidance for Q1 on base business growth. What we're saying is 12% to 16% organic growth for the year. And obviously, as we go through the year, we'll comment on exactly what happens in Q1, H1 versus H2. But this is kind of a unique year. I think, don't forget that even though 2022 is finished, we grew 39% organically with our base business. That is so far ahead. of where our industry has been growing. So I think there's a lot of goodness, a lot of momentum that the company has built up over the years. This is going to be a challenging year, guys. We're going to be in that 12% to 16% range. I said what the challenge is really on the chromatography end. But medium, long term, we love what we're doing. We love our products. We like the position we have in the market. And yeah, we don't see any reason why we can't grow 20% plus for the foreseeable future. with the exception of 2023 as we work through these headwinds.

Got it. Okay, that's helpful. And then on the gross margin side, John, we're just wondering if there was any pricing pressure that you are accounting for. And Tony, maybe just on product obsoletion, product expiration, any write-downs that CDMOs might be taking there. Just could you elaborate a bit more on that? And if I could just squeeze in on a PAT question, there was a large acquisition in this space, or PAT at least, so wondering how DRS Daylight Solutions is positioned versus the sort of light scattering capabilities that were acquired recently by a competitor. Thank you.

Yeah, so maybe I'll start with the Waters acquisition and why. Great company, great technology, know them pretty well. I think laser light scattering, key technology in our industry. When I look at what we're doing with our C technologies and with DRS, we're really in a good position in terms of inline technologies, right? I think it's I think when you look at what we have, you can put Cloak VPX in line in a manufacturing setting. We will be able to put the DRS, Daylight Technology, in line. And our strategy is more around, you know, getting to in-line monitoring, real-time monitoring, as opposed to quality control, testing, or offline monitoring. So I think that piece, you know, is kind of how we view it, where we're more an inline company. In terms of the question on obsolescence, I'm sorry?

No, it's pricing and obsolescence. Thank you.

Yeah, yeah, yeah. I was going to answer it. So obsolescence, we're not seeing that as an issue, right? And I think it's really the inventory buildup at our customer level that just has to work through it. And then John can answer the question on margin.

Can you repeat the question on margin? Just want to make sure I get it right.

Yeah, John, just pricing. Are you seeing, you know, a decline in pricing or pricing impact? And what's the pricing assumptions that you have for 23? Just wondering if there's an impact from that in gross market. Thank you.

Yeah, we have not, you know, been seeing pricing pushback of significance. We did finish 22 with just, you know, above 5% price achievement, as we indicated we were gunning towards. So that wasn't a major issue. For 2023, we definitely have raised prices again, working with our customers, you know, with the intent to cover inflation. And we expect for 2023 that we should be able to get 4% to 5% price achievement this year. Thanks, guys.

Yeah, thanks, Puneet. The next question will come from Marta Nazarovitz with JMP Chase. Please go ahead. The next question will come from Lisa Garcia with UBS. Please go ahead.

Hey, guys. Good morning. Thank you for taking the question. So let's start with cell and gene therapy, obviously. Those accounts, it seems like, you know, over 20, now doing a million, generating a million dollars. The order book feels pretty good. Can you maybe talk to kind of how to think about the cadence across 2023 and your assumptions for the growth there? It seems a little bit kind of lower than the order book at the moment. And I know, obviously, tough comps, but it would be great to dig in there.

Yeah, so selling gene therapy, great year last year, no doubt about it. But like every other business we have, right, we saw orders slow down in the second half of the year. I think what people forget is that 50% of our cell and gene therapy revenue comes from CDMOs. And so we're telling and calling out that CDMO order book's been really light and it's got to pick up. So when you think about our cell and gene therapy growth and any upside in cell and gene therapy growth, it's going to come from the CDMOs coming back to where they were in the early parts of 2022. Great.

Thanks. And then maybe just new product introductions and how to think about the cadence for this year. It's obviously 10 this year. Zoom the 9 to 12. It would be great to kind of dig in there and understand a little bit better kind of what you're hoping for.

yeah so you know one of the big things we've been doing for the last you know three plus years is really focused on increasing the cadence of bringing new products to market and as i said in my prepared more remarks right we had a we had a really good um year last year 77 of our revenue came from uh products launched in 21 and 2022 and if you go to this year add in the products going to get launched this year overall the products then launch 2021 2022 and 2023 will be around 14 percent um that's exactly what we want to see right we're we're investing at a level five percent into r d five and a half percent and you can see based on on the traction we're getting in the marketplace with our new products we're more than covering the cost of running r d at the company so we're really thrilled with uh how well our R&D programs are going, the products that we have in the portfolio. And it's exactly what you would want from a disruptive, innovative company like Repligen that our R&D products are actually gaining traction and they become a catalyst for growth. So maybe back to, I think it, I'm not sure if it was Puneet or Jacob about, you know, are we standing behind, you know, long-term growth? This is where you know, the extra 5%, 7% is going to come from on an annual basis. It's going to come from what we're doing on the R&D side. And that's why it's so important to us to continue to, even in a tough year like 2023, maintain our investment in R&D, get the products out, because they are the stepping stones and foundation for the next five plus years.

Great. Thanks, Ed.

The next question will come from Matt LaRue with William Blair. Please go ahead.

Hi, good morning. You know, obviously the biggest top line delta outside of COVID is chromatography, as Tony called out, and going from 45%, 22% to 10%, 23%. Could you help us maybe, if resident availability was not a problem, what would growth look like? In other words, what does the demand look like? And at this point, is the issue more on customers, you're waiting on customers to accept the new products, or are you still actually waiting on the raw material, the resin availability, and then the product can be accepted by customers?

Yeah, so maybe a quick synopsis of how we manage our chromatography business with pre-packed columns. If you went back five years ago, Repligen was procuring resins for you know, to pack into our chromatography column. So the interaction was directly with the suppliers of resins. But we made a conscious decision really in 2018, 2019 to really move away from replicant procuring to the customers shipping us the resin or having it drop shipped from the supplier. So it's not our conversation anymore. or our interaction with the main players on the resin supply, it's actually our customers. They're not getting the resins fast enough. And so we have a quite a large order book. And, you know, if we were, if there was no limitation on resin, I think we would be right around that 25% mark in terms of growth. And so, you know, when you're at 10, right, and you just, your resin supply is not coming in at the pace it was even coming in in q3 and q4 it's definitely disappointing it's out outside our control and therefore you know we know capacity is coming online we've had those conversations with the various players but i think there is an acceptance piece that uh also happens where people have to qualify in you know a new manufacturing location so that it starts to get used so i do think it's going to improve as we go as we go through the year but it's definitely much lower than we were anticipating even back in January.

Okay, that's helpful. And then, John, just on the facility depreciation headwind, I guess as we think about how that should pace throughout the year and then 24, obviously 21 and 2 were capex heavy years. You talked about 69 for 24. I presume that should begin to sort of moderate in the back half, but just as we're building out our gross margins, if you could help us think about one-half versus two-half, again, understanding the comments to Dan's question about margins having a low in Q1 and building from there. But any of this will help, particularly on the depreciation side will be helpful.

Yeah, sure. So the $60 million of CapEx that we mentioned is a 23 number, not a 24 number, just to be clear on that one. As we look at the facilities and depreciation costs, they will, I would say from a gross margin modeling perspective, maybe you start at the lower end of the overall gross margin at the beginning of the year and then scale it up as we go through the year. That would be my recommendation for the current time.

But I think the most important piece on depreciation and facility costs is that it's a fixed cost, right? And so as our volumes increase, right, margins are going to improve. So we've made this big investment, as everybody knows, over the last three years to build out capacity to give us dual manufacturing capacity and business continuity plans. So this is going to pay off as we go through the next few years and margins will improve.

And I think even the second half of 2023 should improve from the first half of 2023. So that's kind of the scaling that we talked about in the layering in. Later first half, better second half.

Okay. All right. Thanks for the question.

The next question will come from Brandon Coyler with Jefferies. Please go ahead.

Hey, thanks. Good morning. John, on the mix dynamics, could you just stack rank the segments from highest gross margin to lowest gross margin? Aside from the COVID runoff, what exactly are the mixes in 23? Where those come from?

In 2023. So the declining, you know, declining revenue, yeah, declining revenues from the, you know, much of the COVID-related volume was high margin, you know, filtration, right? So it's hollow fiber, it's flat sheet filtration, which are really high margin products for us, the consumable components. You know, we don't give specific margins for every product, Brandon, but I can tell you those are very high contribution margin products. And they're coming in being replaced with Opus, being replaced with systems and fluid management products that are coming in at a lower pace. And we think as we've got facilities built out, as Tony and I talked about earlier, as we start to pump volume through our facilities, those costs will get spread out better and we'll gain margin traction over time. But I can tell you the Opus margins, you've known that for a long time, are a bit lower than the others. And then systems and fluid management are a bit lower clearly than the filtration stuff, you know, the specific filters and consumables.

Got it. And, Tony, how do you feel about the M&A pipeline right now? Are you seeing, you know, private company valuations reset at all? And where in the portfolio would be your priorities?

Yeah, you broke up a little bit, but I got the gist of the question. I would say M&A pipeline is pretty similar in terms 2023, as we saw in 2022, we continue to be active in the sense that we have lots of different companies that we're talking to. I think our pace of M&A, Brandon, is not going to be too dissimilar to what we've seen over the last four or five years. I think we had a big pickup in 2020, 2021 during COVID where we were systematically building out our fluid management But I think a deal a year pace is probably a good assumption. And to your second part of that question, I do think that the multiples have come down a little bit, but it's all in the eye of the beholder.

The next question will come from Matt Hewitt with Craig Hallam. Please go ahead.

Good morning. Thank you for taking the questions. Maybe for the first one, I'm trying to piece two different comments that you made together. First, you were talking a little bit about the resin availability and lengthening some of the inventory issues. And then also the fact that obviously those resins are acquired by your customers and then shipped to you. Does that create or lengthen the inventory channel issues that you've kind of been facing over the past couple of quarters where the customers are having to turn to inventory. I mean, does this kind of exacerbate that problem or is it a completely different issue?

I think it's a different issue, Matt. I think it's more that if I, if I looked at the last two or three years and I'm, I'm certain that, you know, the major resin suppliers would, would give you this exact same view that, I think the demand is exceptionally high. I think customers are placing orders, you know, six to nine months out. That has not come in, whereas the rest of the industry has as capacity has come online. So that's the one area in our industry where it really hasn't. It's come down a little bit in terms of lead times, but not enough to change the order pattern or the length of time it takes for those residents to get, A, procured and then delivered, whether it's directly to the customer or drop shipped to us.

Got it. And then obviously you built out a lot of capacity the last couple of years. As far as hiring plans are concerned, are you feeling like you're in a pretty good place from a headcount standpoint, or do you anticipate needing to fill some more roles given the demand that you're anticipating in the back half of the year and into 2024? Thank you.

Yeah, I would think that on the headcount piece. Even during the days of COVID, we tried to be pretty prudent about where we hired, what we hired, which facilities. And as we went through Q4 and again here in Q1, we continue to optimize, right? We're looking at where the demand is, what headcount we need to support the forecasts that we have for the year. And we've done a lot of that optimization over the last couple of months.

Understood. Thank you. Thanks, Matt.

The next question will come from Connor McNamara with RBC Capital Markets. Please go ahead.

Hey, guys. Thanks for taking the question. I appreciate it. If you just look at the guidance that you're giving, it's about a 4% cut relative to what you were talking about in Q3. By my math, that's about $25 million in sales. So is there any way to break that out? How much of that is the inventory destocked at the customer level versus the resin impact versus anything else?

Yeah, I mean, I think as, so there's a one point of FX, right? So I think depending on how we all do the math, that's somewhere between three and four points versus what we were talking about in January timeframe. I think the majority of that is really coming from chromatography. And I would say it's kind of the rest of it is just dispersed across the other business. There's no one business where I would look at it and say, It might be 1% lower or 2% lower than we were thinking overall. But the main difference where we were in January versus where we are now is chromatography.

Got it. Thank you. And then just longer-term margins, if you get towards that 27, 28 targets of $2 billion, Where can gross margins go longer term? Can you get back to the high 50s, or should we be thinking about longer term kind of in the mid-50s gross margin range?

Thank you. I would say that, you know, obviously challenging to give you exact numbers on where we think margins are going to be five years from now, but I think, you know, between the investments that we've made, capital investments we made in 2021, especially in 2022, and there's some finishing off work we have to do in 2023, that pretty much gives us capacity all the way out to that 2027 timeframe. So our expectation is margins are going to go up. Our expectations next year is that we can add 100, 200 basis points onto our gross margin line. And maybe after that, it becomes 50 basis points or whatever it is, 50 to 100 basis points. Just hard without knowing what the product mix and what M&As we might do over the next few years to give an exact number. But it will definitely march up, Connor.

Got it. Thanks for that, Tony. I appreciate it.

The next question will come from Justin Bowers with Deutsche Bank. Please go ahead.

Hi, good morning. It's Asaf speaking on behalf of Justin. Just two quick questions. So firstly, you mentioned cell and gene therapy business growing significantly in 22, a little slowdown as well, and also a 25% step up in gene therapy during Q4. Which indications in cell and gene therapy are you gaining traction in? And as you look at 2023 and 2024, how are you thinking about the growth rates in these modalities?

Yes, so I think when I made my comments on pharma in Q4, clearly that was also impacting cell and gene therapy in a very positive way. The challenge, as I said, is that half our cell and gene therapy business is coming from CDMOs, and while we definitely saw a pickup in Q4, it needs to continue to increase as we go through the next few quarters. So while... we're calling 15% to 20% for cell and gene therapy. Overall market growth could actually be higher than that, but that's just because we have a lot of customers sitting on inventory. So they're using the products and they're developing products and getting them through phase one, phase two. I think long-term cell and gene therapy with mRNA all bundled in is probably going to be growing 20% to 30% on average in the out years. But this is just a unique year because of stocking at the CDMO level.

All right. Thank you so much for the call. I appreciate it. And just lastly, which areas of material cost inflation were greater than anticipated? And does the guide contemplate that they stay elevated at these levels in 2023? Or is there like some relief at some point in the year?

Yeah, I mean, it's areas like plastics and stainless steel and a lot of those types of areas where we see the significant inflation. Our guidance contemplates what we believe is going to be the inflation for the 2023 period, yes.

All right. Thank you so much.

This concludes our question and answer session. I would like to turn the conference back over to Mr. Tony Hunt for any closing remarks. Please go ahead, sir.

Great. Thank you, everybody. Appreciate everybody joining today. You know, obviously, we've covered a lot. obviously the 2022 stellar year. We got some headwinds as we moved through the first half of this year, but I think we're very optimistic about the second half of the year and overall, and look forward to getting back on a call in a couple of months and bringing up to speed of where we are in Q1. So thanks everybody for joining.

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