Repligen Corporation

Good day, ladies and gentlemen, and welcome to the replicant first quarter of 2023 earnings conference call. My name is Vaishnavi, and I will be your coordinator. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star, then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on the touch-tone phone. To withdraw your question, please press star then two. In order to accommodate all individuals who wish to ask questions, there will be a limit of two questions at a time. Please note this event is being recorded. I would now like to turn the call over to your host for today's call, Sondra Newman, head of investor relations for Repligen. Please go ahead.

Thank you and welcome everyone to our first quarter of 2023 report. On this call, we will cover business highlights and financial performance for the three-month period ended March 31st, 2023. We'll also provide updates to our financial guidance for the full year. Replicant'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 10-Q, our annual report on Form 10-K, and the current report on Form 8-K 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 Repligen's website and on sec.gov. Non-GAAP figures in today's report include the following, revenue growth at constant currency, growth profit and gross margin, operating expenses, including R&D and SG&A, operating income and operating margin, 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 Replicant's current results against historical performance and the performance of peers when evaluating investment opportunities. Now I'll turn the call over to Tony.

Hey, thank you, Sandra. And good morning, everyone, and welcome to our Q1 earnings call. The Sonar Press release this morning delivered an excellent first quarter, given the bioprocessing industry market dynamics, with 7% revenue growth for our base business at constant currency, and stronger than expected growth in operating margin. Overall revenues of $183 million for the quarter were down 9% in constant currency due to the predicted reduction in COVID-related demands. The story in the quarter was the performance of our protein chromatography businesses, where we saw solid gains and an increased contribution from non-COVID mRNA programs in the cell and gene therapy space. COVID-related revenues came in as expected at Cell and gene therapy orders were strong, up 40% sequentially and 20% versus the average quarterly order intake in 2022. The region where orders were soft was China, down 40% sequentially and 60% versus a year ago. Challenges in the region were driven by a combination of inventory burnout that was built up during COVID and lower demand from CDMOs and pharma. Based on current projections, we expect it will take another few quarters for China to return to a more normalized level of demand. Base orders in the other regions performed reasonably well in Q1 with a combined book-to-bill of 1.0. Activity and interest at a customer level remains high with many customers scaling here in 2023. However, given the lack of order growth across the regions and the situation in China, and APEC to a lesser extent, we feel it's prudent to adjust for outcome for the year. We do expect overall orders for the company to pick up in the second half of the year and continue to strengthen as we move into 2024. Our expectation now is to report to 8% organic growth in our base business with our COVID outlook unchanged at 30 to 40 million. Strategically, we continue to make selective investments across our product portfolio. We see 2023 as an important year to complete several key R&D programs, and our intent is to increase our spend to approximately 6% of revenue. We have four new product launches planned by mid-year, supporting our filtration and analytics franchises, with additional launches in the second half positioning us well for 2024. We continue to see strong traction for many of the new products we launched in 2021 and 2022, which contributed 10% of our overall revenues in the first quarter. We saw a strong demand for our synchromatography filtration systems and a high level of activity around our most recent launch, our RPM system with inline analytics. On the M&A front, we closed on the acquisition of FlexBio systems in mid-April, giving us another play in fluid management with the addition of single-use bags. We focused our M&A efforts over the last few years on building out fluid management vision And we believe that Flex Biosystems technology in 2D and 3D bag manufacturing is a core competency for the company and something we can build upon over the next few years. With the newly built 7,000 square foot manufacturing space, we expect to increase the number of opportunities for Flex Biosystems through our dedicated commercial team and deliver approximately 5 million in revenues this year, with the business ramping up quickly in 2024. As we look to 2024, our goal is to be back to 20% plus growth for our base business, armed with a broader portfolio of products and to return to more historical growth levels across the regions. So moving now to our quarterly performance. As mentioned earlier, the story of the quarter was the performance of our proteins and chromatography franchises and the overall performance itself in gene therapy. In chromatography, our Opus prepack column business had an excellent quarter for orders and revenue. Overall revenue for Chrome came in at close to 20% against the lighter comp in Q1 of last year. We saw a greater than 50% increase in revenues and orders from new modality accounts focused on mRNA, viral vector, and plasma manufacturing. As highlighted in our year-end call, chromatography resin supply remains tight through the first three months of this year, and while our results were strong year on year, our base chromatography revenues were down 15% sequentially. Our expectation is that Q2 will be similar to Q1, with revenues picking up in the second half of 2023 as more resident supply comes online. We continue to expect our chromatography franchise to grow approximately 10% this year. Our proteins business had a good quarter with year-over-year reported growth in the high single digits in Q1. The expected drop-off in sativa ligand demand during the first quarter was more than offset by the performance for other ligands and growth factors as we continue to transform our proteins business with replicant-developed products. We expect proteins to be flat here in 2023. In filtration, our business was down approximately 20%, as reported, driven by a predicted sharp decline in COVID-related revenues. For the base filtration business, revenues were down less than 5% against a tough comp in Q1 last year. Base filtration revenues in Q1 were essentially in line with the revenue in the previous quarter. Our artisan systems and flowpads and XLATF performed well in the quarter, with our systems and flowpad revenues up over 200%. New modality strength came from cell and gene therapy, including mRNA. We are seeing the benefits of our relationships established during COVID, as many of these companies have pivoted to mRNA programs in vaccines and therapeutics. We expect mRNA to be a catalyst for growth over the next few years as new vaccines and therapeutics make their way through clinical trials. Overall filtration orders for the quarter were down versus a year ago, which is driven by the aforementioned weakness in China and APAC for CDMO and pharma-demanded soft. We expect our filtration franchise will start to recover during Q3 as the macro headwinds subside and customers complete their destocking activities. and flat up 8% on base business. Finally, our process analytics business had an excellent quarter on orders, which were up over 30% year on year. While revenues were up slightly versus prior year, the order growth rate is very encouraging. We continue to expect this business to deliver 15 to 20% growth here in 2023. So overall, we're off to a solid start for the year. However, given the macro environment, and for the company. Repligen continues to be well-positioned with a great suite of innovative products and strong traction in key areas of the market to manage through the next six to nine months. We do expect to see order pick up during the second half of the year, which will put us in a good position for 2024. We remain very optimistic about medium to longer-term potential in bioprocessing once we navigate through the next few quarters. With that, I will turn the call over to John for the financial update. Thank you, Tony. Good day, everyone. Today, we are reporting our financial results for the first quarter of 2023, as well as updating our financial guidance for the year. Unless otherwise mentioned, all financial measures discussed reflect adjusted non-GAAP measures. As shared in our press release this morning, we delivered revenue of $182.7 million in the first quarter. The highlight continues to be the performance of our base business, which grew by 7% at constant currency, driven by the performance of our chromatography and proteins businesses, despite challenging market conditions. For the first quarter, our total revenue decreased by 12% as reported and 9% at constant currency. FX impact for the quarter was above 5 million, creating a three-point headwind on reported growth. Based on current conditions, we expect FX headwinds to continue through the first half of 2023 and then shift to tailwinds in the second half, netting out to a zero impact for the full year. For our overall revenue performance, we saw year-over-year reduction in COVID revenue of 30 million. This was partially offset by performance in our base business, which grew by 10 million, or 4% as reported, and 7% in constant currency. As it relates to regional revenue growth, we saw strong performance in Asia with Europe and North America down as expected due to COVID revenue declines. For the quarter, overall revenues from Asia, rest of the world increased by 21% while North America and Europe contracted by 15% and 21% respectively. While revenue growth in Asia was strong, orders in the region especially in China, dropped off significantly, setting us up for a tougher last three quarters in 2023 for this region. Regarding overall revenue distribution by region for the first quarter, Asia represented 23%, Europe represented 39%, and North America represented 38% of our global business. Now moving down our income statement. First quarter 2023 adjusted gross profit was 100.8 million, a reduction of 23.8 million, or 19%, compared to the 2022 first quarter. Adjusted gross margin of 55.2% in the quarter goes down from 60.4% in the 2022 first quarter. Gross margin declines compared to the 2022 first quarter are related to volume deleverage, less favorable product mix tied to COVID revenue declines, material cost inflation, and higher expenses tied to our capacity expansions. Sequentially, gross margins in the quarter improved by 370 basis points for our fourth quarter 2022 performance of 51.5%, driven by improved product mix benefiting our material costs, price increases covering material cost inflation from suppliers, and operational cost optimization in our business. Now transitioning down to P&L to adjusted operating expenses. Adjusted research and development expenses for the first quarter of 2023 were 6.7% of revenue. As Tony mentioned, we are focused on ramping up our R&D efforts here in 2023 in order to launch key new products into the market this year, with our primary focus areas being filtration and systems. Adjusted SG&A expenses for the first quarter of 2023 were 26% of total revenue compared to 22% in the same 22 period. Year over year, percentage increases are tied to capacity expansion and investments in commercial resources to continue to drive growth and market share gains in the short and long term. Now moving to adjusted earnings and UPS. First quarter of 2023 operating income was 40.9 million compared to 67.4 million in the prior year quarter. An adjusted operating margin is 22.4% compared to 32.6% the same prior year period. Adjusted net income for the first quarter of 2023 was 36.3 million compared to 53.7 million in the same quarter of 2022, a 32% reduction. Adjusted fully diluted EPS for the first quarter of 2023 was $0.64, compared to $0.92 in the same 22 periods. A decline of $0.28, or 31%. Our cash, cash equivalents to short-term investments, which are GAAP metrics, totaled $618 million at March 31, 2023. 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 release. 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 flat on full-year sales. and includes financial estimates for flex-biosis acquisition closed on April 17. Guidance does not include potential impact of any future acquisitions that the company may pursue. Based on our current view of market conditions, we are revising our 2023 full-year revenue guidance, the GAAP metric, to a range of 720 to 760 million, a reduction of 40 million at bid point compared to our February guidance. This revised guidance reflects overall reported and constant currency growth of minus 10% to minus 5% and organic growth of minus 11% to minus 6%. Our overall revenue guidance includes COVID revenues of 30 to 40 million, consistent with our February guidance. And we have included 5 million of revenue from our FlexBiosis acquisition. We are updating our base business revenue guidance to a range of 685 to 715 million, growing at 4 to 8% as reported and at constant currency. This compares to our February guidance of 730 to 760 million, growing at 11 to 15% as reported and 12 to 16% at constant currency. We are revising our 2023 adjusted gross margin guidance to the range of 52 to 53% 50 basis point reduction from our previous guidance of 52.5 to 53.5%, driven primarily by lower revenue projections for the year. We are modifying our adjusted operating income guidance to a range of 153 to 158 million for the year, 23.5 million at midpoint from our February guidance of 176 to 182 million. Our adjusted operating margin guidance is now in the range of 20.5 to 21.5% for the year compared with our February guidance range of 22.5 to 23.5% of revenue. Adjusted other income guidance is being increased to 14 million compared to prior guidance of 10 million. And we continue to expect 2023 adjusted income tax expense to be approximately 20% of adjusted pre-tax income. We are revising our adjusted net income guidance to the range of 134 to 138 million, a difference of 15.5 million at midpoint from our February guidance of 149 to 154 million. We are revising our adjusted EPS guidance to the range of $2.35 to $2.42 per fully diluted share. a reduction of 27 cents from our previous guidance of $2.61 to $2.69. Our adjusted EPS guidance assumes $57.1 million weighted average fully diluted shares outstanding at year-end 2023. Adjusted EBITDA is now expected to be in the range of $190 to $194 million. A reduction of $24 million at midpoint from our prior guidance, $213 to $219 million. With depreciation and intangible amortization expenses expected to be approximately $35.7 million and $30.2 million respectively. Adjusted EBITDA margins continue to be strong and are expected to be in the range of 25.5 to 26.5% for the year. reflective of the exclusion of fixed depreciation costs from our capacity expansions from this metric. We expect year-end cash and cash equivalents, a GAAP metric, to be in the range of $620 to $640 million, with $60 million of CapEx investments being fully funded by cash generation from our operations. This provides any cash figures inclusive of cash payments made for our April acquisition of FlexBios. This completes our financial report and guidance update, and I will now turn the call back to the operator to open the lines for questions.