Repligen Corporation

Good day, ladies and gentlemen, and welcome to Repligen Corporation's second 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. Please note 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 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, Sondra Newman, Head of Investor Relations for Repligen. Please go ahead.

Thank you, Vaishnavi, and welcome to our second quarter of 2023 report. ON THIS CALL, WE'LL BE COVERING BUSINESS HIGHLIGHTS AND FINANCIAL PERFORMANCE FOR THE THREE- AND SIX-MONTH PERIOD ENDED JUNE 30TH, 2023. WE'LL ALSO PROVIDE AN UPDATE TO OUR FINANCIAL GUIDANCE FOR THE FULL YEAR 2023. REPLAGEM'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 our current reports on 8-K, including the report that we're filing today, also other filings that we make with 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, cost of sales, gross profit and gross margin, operating expenses, including R&D and SG&A, operating income and operating margin, income tax expense, net income, and net income per share, as well as EBITDA and adjusted EBITDA. These adjusted financial measures should not be viewed as an alternative to GAAP 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 Q2 earnings call. As you saw in our press release this morning, we delivered $159 million in total revenue in the quarter, down 13% sequentially and 23% year-over-year. Our base business, which excludes COVID revenue and inorganic M&A, delivered reasonable performance, where revenues in the quarter were down 2% sequentially and 9% versus Q2 of last year, in what continues to be a very challenging macro environment. Looking at the first half of 2023, we delivered $342 million in total revenue. Overall, this was down 17% versus H1 of last year, with the base business again holding up relatively well down less than 3% in the same period. As a reminder, our base business is coming off two years of stellar growth. This makes the comps really challenging. In 2022, our base business was up 41% for the second quarter and 34% for the full year. And in 2021, our base business was up 34% in the second quarter and 38% for the year, in each case, well above market growth. On a franchise level, We saw revenue growth during the second quarter in three of our four businesses, the exception being Filtration, which continues to recalibrate to post-COVID market dynamics. Filtration by far has the largest market inventory overhang and was the primary contributor to revenue declines in the quarter, with base Filtration down 20% year over year off a tough comp and down 2% sequentially. Strength of the quarter came from our analytics, chromatography, and protein franchises. For the quarter and first half of the year, we saw mid-single to double-digit base business growth. Another area of improvement was cell and gene therapy, which includes non-COVID-related mRNA. Revenues were up 7% sequentially, though down 4% versus the prior year, also on a tough call. The quarter-over-quarter growth in new modalities was led by chromatography and analytics, where we saw a strong adoption of our Opus columns and process analytics products, and by commercial approvals, which should be a catalyst for future growth. On the orders front, our book-to-bill for the base business was 0.82 for the quarter and 0.88 for the first half of the year. Within our base orders, cell and gene therapy orders were up 4% in the quarter. Overall, cell and gene therapy is proving to be a steady performer for us here in 2023, with first half book-to-bill at 0.96. However, the big change that we are seeing in the market in the second quarter is a drop-off in demand from pharma, which includes biotech, along with the slowdown in orders at the CDMO level after two quarters of modest gains. The headwinds in the market, which have been predominantly related to inventory overhang and confined for the most part to the CDMO and component integrator sectors of the market, have broadened. Pharma-based revenues were solid in the second quarter, and have remained consistent for the past five quarters, while pharma orders have softened. In the first quarter of this year, orders were down primarily due to weakness in China. This broadened in the second quarter, where pharma-based business orders were down 25% in the quarter year on year and 17% sequentially. We are seeing longer purchasing and approval timelines for capital equipment purchases and delays in pharma projects. where some programs are getting pushed out by one to two quarters. We are also seeing pharma drawing down inventory levels on consumables, something we didn't observe in 2022 when pharma demand remained strong throughout the whole year. Of the 25% drop in pharma orders here in Europe, we estimate that about a third came from softness in capital equipment spend, a third from consumables inventory drawdown, and a final third is related to China. Orders from seeding mills also softened down 10% sequentially, but still up 9% for the first half of this year versus the second half of last year for both base and total CDMO orders. Regionally, China ordering remained weak in the second quarter with no improvement versus Q1, although APAC orders were up 15% excluding China and up 5% as a whole. With this backdrop, forecast demand for the second half of 2023 has dropped across many of our product lines, impacting all of our franchises except for analytics. For the full year, we are de-risking our revenue guidance and now expect revenues in the range of $635 million to $665 million, which implies a base business decline of 5% to 9%. Before moving on to our second half strategic priorities and an update on Q2 performance by business, I do want to comment on base business performance and why I believe we are still well-positioned to grow above market as our industry comes out of this downturn. The portfolio we have put together over the last 10 years is highly differentiated, and this has been reflected in the growth we have seen over the last five years, where we have consistently outperformed the market. From 2019 through 2022, our average base business growth for the three-year period was 28%. If we include 2023 using the midpoint of our newly revised 2023 guidance, both the three-year and five-year averages come in at 22%. We have an enormous amount of confidence in our strategy, and we remain confident about the medium and longer-term growth potential for the company. In the near term, we expect that market conditions will start to improve in Q4, and this is based in large part on our strengthening funnel where we have seen a 25% increase in high-probability opportunities over the last three months. Beyond the macro environment, I believe we are executing exactly the way we should be to drive growth for the company. That said, we do need to focus our immediate efforts here on second half of 2023 on the following three priorities. The first is around optimizing our resources and controlling costs. It's clear that the surge in demand related to COVID required us and the industry to ramp up capacity. This leaves us with the post-pandemic reality of lower volumes and associated lower margins. To address this, we've started to rebalance our resources and spend over the last few quarters, especially in the manufacturing of our filtration and component products. We're now expanding and accelerating this program with the goal to complete the process over the next few months. We believe this will put us in a better position to see margin improvement in 2024. Second is our commercial focus, We spent a lot of time here in 2023 building on our sales funnel, which continues to grow and expand. As I mentioned, the challenges around delays and closing out opportunities and dealing with our customers' longer purchase cycles. For example, the time it takes to close out capital equipment opportunities and associated consumables has moved from three to six months out to six to nine months. We expect this conservatism in the market to remain through 2023. but we do anticipate orders to pick up again in Q4. This would have a positive impact on Q1 2024 revenues, but not material impact what we can ship in Q4 this year. We're also investing in building out our top-down corporate key account program, which we kicked off in Q3 last year. The response from the top pharma and CDMO accounts has been very positive, and we have initiated new programs to embed replicant products at these accounts. We feel this is an appropriate time in our journey to balance the efforts of our commercial team with a corporate account structure as we become a larger and more integrated player in bioprocessing. And finally, new product launches. A key part of our strategy this year involves disruptive product launches. And in 2023, we are on track to launch H10 products. Contribution from new products launched in 2021 through Q2 of this year counted for 12% of our revenues in the second quarter. slightly above the 10% we saw in the first quarter. A key launch in Q3 will be a first-to-market, soft-contained, flat-cheeked set, which does not require external sealing for setup and performance. This is ideally suited for customers working on ADCs and gene therapy drugs, where full containment is required. Continuing to introduce and scale differentiated bioprocessing products into our customers' manufacturing workflows remain core to our culture and to driving the long-term growth for Repligen. So moving now to our quarterly performance. As mentioned earlier, the story of the quarter was the performance of our chromatography, proteins and analytics franchises and the overall performance in cell and gene therapy space. In chromatography, second quarter revenues increased approximately 5% year on year. Opus revenue was essentially flat versus prior year. However, Opus unit growth in the quarter was up more than 15% as more customers and drop shipping residents to us at our facilities in North America and Europe. The driver of Chroma revenue growth in the quarter was our artisan systems and flow paths, which were up more than 50% year-on-year. For the first half of 2023, Chroma was up over 10%, again driven by artisan systems and flow paths, which nearly doubled year-on-year. As noted in prior quarters, we expect Opus Residence supply to pick up here in the second half of 2023, and we are guiding to full-year chromatography growth of 5% to 10%, slightly down from what our prior guidance of 10% based on column resin mix. Our performance had a solid quarter in first half of 2023 with year over year organic growth in the mid single digits for the quarter and for the first half of the year. We saw consistent performance across the portfolio in the first half of the year, which was very encouraging. However, the challenge is now in the second half. The slowdown in demand at pharma accounts is impacting proteins. with lower second half forecasts for both their leggings and growth factors. The push out in demand is coming from project delays, where we are seeing programs move out by up to six months. Based on this, we are now guiding to our proteins business being down 10 to 15% here in 2023. Infiltration, our business was down approximately 40% of the quarter, driven by a predicted sharp decline in COVID-related revenue, which was nominal in the second quarter of 2023. Looking at our base filtration business, revenues were down 20% in the second quarter and 13% for the first half of 2023 against challenging comps. Sequentially, base filtration revenues in the second quarter were down slightly at 2%. Filtration orders during the quarter were soft, but as mentioned previously, we're encouraged by the strength in our filtration funnel and we do expect orders to pick up in the second half of this year, most likely in Q4. For the year, we now expect this franchise to be down approximately 30% overall and down 14% on base business. Finally, our process analytics business has been performing well, with second quarter revenues up 15% to 20% and first half growth of almost 10%. We continue to see strong traction for our inline analytics portfolio, led by the FlowVPX and RPM systems, where we're integrating real-time process management into our cross-flow TFS systems. We are also seeing strong performance from an install base for solo VPEs. I expect this business to deliver 15% growth in 2023. So overall, we delivered a little north of $340 million in the revenue in the first half. The macro headwinds, which have been confined to CDMOs and integrators, have spread to the pharma sector, which makes the second half of 2023 more challenging. We have a strengthening pipeline of higher probability opportunities that we expect to translate into increased orders in Q4. Gene therapy continues to be resilient. We continue to bring new products to market. And finally, we're taking charge of optimizing our resources to control our margins. We're confident the bioprocessing markets will turn in a positive direction in 2024, and we are well positioned to capture our share. With that, I will turn the call over to John for the financial update.