Repligen Corporation

Good day, ladies and gentlemen, and welcome to Repligen's 2023 Third Quarter Earnings Conference Call. My name is Keith, and I will be your coordinator. Please note that there will be a question and answer session following the company's four remarks. In order to accommodate all individuals who wish to ask questions, there will be a limit of two questions at a time. Please also note that today's event is being recorded. I now would like to turn the conference over to your host for today's call, Sondra Newman, Head of Investor Relations for Repligen.

Thank you, Keith, and welcome everyone to our third quarter of 2023 report. On this call, we will cover business highlights and financial performance for the quarter and year to date and provide an update on our full year financial guidance. Repligen CEO Tony Hunt and our CFO Jason Garland 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 other current reports, including the report that we're filing 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 only non-GAAP financial results and guidance, unless otherwise noted. Reconciliations of GAAP to non-GAAP financial measures are included in the press release that we issued this morning which is posted to Replicant's website and on sec.gov. Adjusted non-GAAP figures in today's report include the following. Book-to-bill ratio, base business revenue, revenue growth at constant currency, cost of sales, gross profit and gross margin, operating expenses, including R&D and SG&A, income from operations and operating margin, pre-tax income, income tax, net income, diluted 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 best reflect the outcomes of our ongoing operations. Thank you. Now I'll turn the call over to Tony Hunt.

Hey, thanks, Sandra, and good morning, everyone, and welcome to our Q3 earnings call. As you know, 2023 continues to be a challenging year for our company and the overall bioprocessing industry as we navigate macro headwinds, primarily destocking in the CDMO and pharma sectors, overall capital conservatism and China weakness. Despite these challenges, we believe we are beginning to see the first signs of recovery play out here in the third quarter. As noted on our August Q2 call, we highlighted our high probability opportunity funnel as indicative of future order demand and projected that these orders would close in late Q3 and Q4. I'm happy to share that our commercial team closed out many of these late-stage funnel opportunities in the last half of the quarter, with the majority of these orders now scheduled for delivery in the first half of next year. Our strengthening order book through the third quarter, where orders were up 16% sequentially, supports our position that demand for replicants products is starting to recover. Our book to bill 1.07 for the quarter was very encouraging, and was primarily driven by large pharma accounts, which were up 50% sequentially and modest growth from CDMOs. Regionally, Europe and North America showed the strongest sequential and year-over-year order gains. The highlights in the quarter was gene therapy, which delivered solid revenue and order growth. About 20% of our total revenue in the quarter came from gene therapy accounts, representing growth of 11% year-on-year. Within gene therapy revenues, filtration, chromatography, and analytics were up in the quarter. More importantly, the average spend from our top gene therapy accounts was up greater than 25% year-to-date as customers continue to scale. Order growth was also strong, up over 50% year-on-year and close to 20% sequentially. The gains in gene therapy are coming from late stage opportunities and commercial wins. with AAV and RNA accounts dominating as the broader gene therapy market continues to be muted here at 2023. We are cautiously optimistic about the early signs of recovery we're seeing. Our expectation is that our markets will improve as we move to the first half of next year. We anticipate that we will have sequential growth in base business revenues in the first half of 2024 versus the second half of this year. For the second half of 2024, we are expecting both sequential and year-on-year gains. Stepping back now to our third quarter performance. Before covering business level performance, I want to spend a few minutes on the three key strategic initiatives that we outlined on our Q2 call. The first is our focus on optimizing our resources and controlling costs. As discussed on the Q2 call, we started to rebalance our resources during the quarter. By the end of the year, we will have reduced our headcount by about 15% versus the end of last year. We will also have consolidated sites, optimizing our manufacturing footprint, especially in the area of filtration. This streamlining of our organization will ultimately put us in a much better position to drive future margin expansion as we move into 2024. Jason will cover our rebalancing activities in more detail in his section. Our second key initiative was to increase our commercial focus and execution. One of the challenges we observed in the first half of the year was the longer cycles on approvals, especially for capital equipment. We also talked about the implementation of a corporate key accounts team to increase our visibility and penetration at our top accounts. During the quarter, we made good progress as the commercial team pivoted to selling our whole product portfolio. The order results, including the strong rebound at our farmer accounts, reflect the effort and focus of this team. That said, there's more work to be done at our CDMO accounts where demand remains soft and at our key accounts for ligands and growth factors where the slowdown in farmers' spend and project delays have impacted these product lines. Based on where we are entering Q4, we don't expect CDMO and protein demand to pick up until early next year. As noted earlier, commercial execution is a top priority for the company. And to that end, we're delighted that Olivier Loyaux joined us in October as our chief commercial officer. Olivier's experience in bioprocessing strengthens our team and should prove invaluable as he takes the reins on our commercial team and business units. Moving now to our third area of focus, which is launching new products. And Q3 was a really busy quarter for us. In August, we announced with Sartorius the launch of an integrated bioreactor system that incorporates Repligen ATF technology. This integrated solution simplifies perfusion in both seed train and production bioreactors. Then in September, we announced the acquisition of mixing innovator Metanova to bolster and expand our fluid management offering. With the acquisition of FlexBiasis earlier in the year, we could see the need to add mixing technology to this portfolio so we could further penetrate the single-use bag market. MetaNova addresses this gap with their mixing and drivetrain technologies. Our goal in 2024 is to build out a broader portfolio of single-use bag solutions and become a more significant player in this part of the market. As noted in the press release, we expect MetaNova to contribute close to 5 million in revenue here in the fourth quarter. Finally, in September, we launched the industry's first holder-free self-contained TFF device, a milestone achievement in the advancement of TFF technology. This product will be ideal for customers working on ADCs and gene therapy drugs for where fault containment is required. So moving now to our Q3 business results. As you saw in our press release this morning, we delivered $141 million in revenue, with our base business down 18% year-on-year and 8% year-to-date. Business highlights in the quarter included strong performance at gene therapy accounts and another growth quarter for analytics. I'll cover more on each of our franchises shortly. On the orders front, year-for-year base orders were flat. Pharma and CDMOs were up in the quarter year over year, with notable strength in pharma, where third quarter base orders were up 23% and orders from our top 10 accounts in pharma were up greater than 20% year to date, which is very encouraging given the drop off in pharma demand in Q2. Moving now to franchise level highlights. In chromatography, third quarter revenues were down mid single digits versus prior year. on tough comps and flat versus prior quarter. Within chromatography, our Opus business was up on unit volume, but down on revenues as we continued to shift away from replicant-procured residents. Q3 was a strong quarter in orders for Opus, up over 20% sequentially, with particular strength in North America. For the first nine months of 2023, chromatography revenues were up 5% and we now expect full year revenue to be flat. Our proteins business had a weak quarter as expected for both revenues and orders, mainly driven by delayed projects and slowdown in demand and farm accounts. As noted on our Q2 call, we continue to expect our proteins business to be down 10 to 15% here in 2023. Infiltration, our year over year revenues were down by over 35% in the quarter. driven by a predicted sharp decline in COVID-related revenue, which was over $25 million in the same period last year. Looking at our base filtration business, year-over-year revenues were down by 17% in the third quarter and 14% for the first nine months of 2023. Within filtration, there were pockets of strength, most notably the artisan TFF systems and assemblies, which were up significantly versus prior year. On the upside, Filtration orders during the quarter strengthened with a book-to-bill ratio greater than 1.15. This was driven by strong demand for Excel ETF, where we are seeing multiple site expansions and late stage wins. All in all, for the year, we continue to expect the filtration franchise to be down approximately 30%. Finally, our process analytics business had another growth quarter, up 7% year-over-year, but slightly down versus expectations. We are seeing strong revenue and order growth in North America, but weaker demand in Europe and China. We continue to see good traction for our inline analytics portfolio led by FlowVPX and RPM, where we are integrating real-time process management into our crossflow TFS systems. While we do expect some year-end dollars to materialize here in Q4, We don't anticipate that it will be significant enough to get us to 15% growth goal for the business in 2023. We now expect our analytics business to grow in the high single digits for the year. Based on all of these developments, we are updating and tightening our guidance to the lower end of the range discussed on our Q2 call. We now expect our full year revenue to be in the range of 635 million to 645 million, which reflects a decline of 9% at midpoint for our base business. So overall, while it's been a challenging quarter on revenues and margins for the business, we have made progress on a number of key initiatives. While macro headwinds continue to persist in the CDMO and China sectors, we're cautiously optimistic that we are seeing signs of recovery with orders picking up in the quarter at pharma accounts, in particular within our filtration franchise, and continued traction at gene therapy accounts associated with late stage commercial processes. It's very important that these early signs of recovery persist and broaden to other sectors of the market over the coming quarters. Before turning the call to Jason, I want to mention that within the next two weeks, you'll be able to access our 2022 sustainability report on our website. We're really proud of the progress we've made on many ESG topics and encourage you to check it out. With that, I'll turn the call over to Jason for the financial update.

Thank you, Tony, and good morning, everyone. First, let me say that I'm thrilled to be a part of the Repligen team. It's been a busy first month in my role, and as you can see and you'll hear this morning, my focus is on optimizing our spending and rebalancing resources to ensure we are in a better position on margins when we kick off 2024. The team has been great and I look forward to picking up where John left off and supporting and continuing to provide clarity on the company's financial and operating performance. Today, we reported our financial results for the third quarter of 2023 and updated our financial guidance for the year. We expected Q3 to be the lightest quarter of the year and total revenue came in at $141.2 million with no COVID sales in the third quarter. compared to $29 million in COVID sales in the third quarter of 2022. This was a year-over-year decrease of 30% as reported, and 31% on a constant currency basis as we continued to navigate through the macro headwinds in our industry. FX provided a slight tailwind in the quarter, and based on current conditions, we expect no significant impact from FX for the full year. Our base business, which excludes COVID-related revenue, And revenue from acquisitions was down 18% on the reported basis and 19% at constant currency. Tony shared the revenue performance for our franchises, but let me highlight the revenue performance across our global regions. For context, North America represented approximately 50% of our global business in Q3, while Europe and Asia Pacific and the rest of the world represented 34% and 17% respectively. The absence of COVID revenue in Q3 versus the $29 million in the third quarter of last year contributed to contraction across all regions. Year-over-year, sales declined in North America by 18%, in Europe by 32%, and in Asia-Pacific by 49%, with China being the biggest driver of that region's decline, down 58%. Third quarter 2023 adjusted gross profit was $59.3 million, a 48% decrease year-over-year, on nearly $60 million of lower revenue, and on a lower adjusted gross margin, which was 42% in the third quarter, down from 57% in the prior year. The year-over-year decline in gross margin continues to be driven by the effect of volume D leverage, particularly with the third quarter revenue at a low point. It was also affected by product mix, primarily the sequential and year-over-year declines from our proteins and filtration franchises. And finally, our gross margins were impacted by higher depreciation and operating expenses tied to our capacity expansions. It's clear that driving volume and margin gains need to be our top company. As Tony discussed, we are continuing to execute a program that started in July to rebalance and streamline the business to support our future margin expansions. There are three main areas of the restructuring plans. First, we are right-sizing headcount and expect to reduce our workforce by 15% versus year-end of 2022. Second, we are consolidating a portion of our manufacturing operations, especially where volumes have gone down significantly post the COVID peak. Third, we're discontinuing the sale of certain product SKUs and took a deep dive into our inventory. We're evaluating materials and components that were secured during the 2020 to 2022 COVID-19 period when a rapid acceleration in demand was countered by a supply chain environment that was exceptionally tight and unpredictable. As a result of these restructuring activities, we still expect to realize approximately $50 million in cost savings in the second half, which will help to partially offset the impact of lower sales volumes. To execute the restructuring, we incur approximately $24 million of charges in the third quarter, of which approximately $21 million were non-cash charges related to accelerated depreciation of fixed assets and inventory write-off, and approximately $2 million were severance and employee-related costs. We expect an additional $2 million of severance charges in the fourth quarter. All of these charges are non-recurring in nature. and are reflected only in our GAAP P&L for the third quarter and total year guidance. Continuing through the P&L, our adjusted operating income was $5.2 million in the third quarter, down $53 million compared to prior year, driven by the $55 million drop in adjusted gross profit just described, offset by a $2 million year-over-year reduction in total operating expenses. SG&A was down 5% versus last year, benefiting from the rebalancing actions taken in August. And R&D was consistent year over year as we invested in technology development and continued to introduce innovative new products like those Tony discussed earlier. Adjusted EBITDA was $14.5 million for the quarter at a 10.2% margin rate. This compares to adjusted EBITDA of $57.9 million with a 28.9% margin for the second quarter of 2022. Adjusted net income for the quarter was $13.2 million, down $31.2 million versus last year, driven by the $53 million drop in adjusted operating income and offset by higher interest income and $10 million less of tax provisions. Our adjusted effective tax rate was negative 5.6%, driven primarily by the efficient use of cash in our sweetest operation to prepare for the funding of our MetaNova acquisitions. We have updated our tax rate guidance for the year to be 18% compared to our prior guidance of 20%. Adjusted fully diluted EPS for the third quarter was 23 cents compared to 77 cents in the same 2022 period, a decline of 54 cents or 70%. Finally, we continue to generate strong cash flow and ended the quarter with $630.8 million of cash cash equivalents, and short-term investments. Please note this cash position does not reflect the MetaNova acquisition that closed on October 2nd. I'll now move to our updated guidance for the full year of 2023. Please note that our GAAP to non-GAAP reconciliations for our 2023 guidance are included in the reconciliation tables and today's earnings press release. And for further clarity, our guidance includes both the impact of the FlexBiosys acquisition and the recently announced MetaNova acquisition. As Tony shared earlier, we are updating and narrowing our guidance towards the lower end of the range discussed on our second quarter call. We now expect the full year revenue to be in the range of $635 million to $645 million, reflecting a 19.5 to 21% decrease in total revenue compared to 2022. Excluding COVID-related sales and acquisitions, our base business revenue is expected to be down approximately 8.5% to 9.5% year-over-year, compared with our previous guidance of minus 5% to minus 9%. There's no change in our projected COVID-related revenues of $30 million. However, our revenue guidance does now include an additional $5 million in revenue from the recent MetaNova acquisition. We are revising our 2023 adjusted gross margin guidance to the range of 49 to 50%, a one percentage point reduction from our previous guidance. This incorporates the low point of the third quarter results, but also a meaningful step up in the fourth quarter. With the gross profit drop offset by some OPEX improvement, we are modifying our adjusted operating income guidance to a range of 96 to $100 million for the year. a reduction of $8 million at midpoint from our August guidance. Adjusted other operating income guidance is expected to increase to $22 million compared to our prior guidance of $18 million. And as discussed earlier, we expect the 2023 adjusted income tax expense to be approximately 18% of adjusted pre-tax income down from our August guidance estimate of 20%. With these puts and takes, we're revising our adjusted net income guidance to the range of $97 to $100 million, a decrease of $1.5 million at the midpoint from our August guidance, which translates to an adjusted EPS guidance of $1.70 to $1.76 per fully diluted share. This assumes $57 million weighted average fully diluted shares outstanding at year-end 2023. Adjusted EBITDA is now expected to be in the range of $130 to $134 million, a reduction of $12 million at midpoint from our prior guidance, with appreciation and intangible amortization expenses expected to be approximately $37.6 million and $30 million respectively. Adjusted EBITDA margins are expected to be in the range of 20.5 to 20.8% for the year, reflective of the exclusion of fixed appreciation costs from our capacity expansion. We expect year-end cash and cash equivalents to be in the range of $455 to $465 million, with $45 million of CapEx investments being fully funded by cash generation from our operations. This revised ending cash figure is inclusive of cash payments made for our October acquisition of MetaNova. Overall, we are pleased with many of the developments in the quarter from strong orders at pharma accounts continuing to execute on strategic M&A, and for putting programs in place to address the margin challenges. We remain optimistic about our markets, our differentiated portfolio, and our positioning in bioprocessing, and we look forward to finishing off the year with an improved fourth quarter. With that, I will turn the call back to the operator to open the lines for questions.

Yes, thank you. 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. If at any time your question has been addressed and you would like to withdraw it, please press star then 2. At this time, we will pause momentarily to assemble the roster. And today's first question comes from Jacob Johnson with Stevens.

Hey, thanks. Good morning, everybody. Welcome, Jason. You mentioned 2024. That's clearly the focus of the inbounds this morning. So you pointed to sequential growth in the first half, but it doesn't seem like year-over-year growth. And then both year-over-year and sequential growth in the second half of the year, that would imply something below your LRP next year and maybe a wide range at that. Should we assume some form of year-over-year growth? I think consensus is looking maybe for something around high single digits organic growth next year. Just any way to kind of frame up the magnitude of growth next year, understanding it's early.

Yeah, Jacob, I think it's going to be hard right now to put a number on 2024. I think there's a high degree of confidence given what we're seeing in the second half of this year, that the first half of next year is going to improve and it's going to be better. The magnitude of how much better, I don't know right now. And I can also say that as we go through the year, we fully expect that orders are going to continue to improve. For us, this quarter though was really key, right? We needed to see some change in the order pattern and it's early, but I think it was very positive to see pharma up greater than 50%. So it really depends on How Q4 plays out, how Q1 plays out before we start calling? You know, how much growth do we see, you know, in the first half of next year versus second half? And then year over year, is that flat? Is that down? It's hard to tell right now.

Got it. No, fair enough. And then maybe for the follow-up, Tony, you all called out. strength from gene therapy customers. I think there's a lot of debate right now about what's going on in selling gene therapy. It seems like maybe there's strength at the later stage of things while maybe earlier stage demands weaker. Just curious kind of what you're seeing in that market right now and then any changes to kind of your long-term outlook for that opportunity.

Yeah, gene therapy, you know, we've been pretty consistent as we talk about the gene therapy market this year. Our growth is coming from late stage and commercial wins. And it's coming from those accounts that we talked about at the, on our Q4 2022 call, where we said that, you know, we had 20 plus customers that were, you know, million dollar plus spend with replicant. That's where our growth is coming from. You're spot on when it comes to the kind of smaller players in the market. it's been soft, right? It's definitely been a lower activity market in 2023 versus what we saw last year. I expect, though, that that's going to change. And, you know, when you look at a normal bioprocessing year, whatever normal is going to be right now, I would say that it's pretty clear that gene therapy can be a 20% plus grower, somewhere in that 20% to 30% range. But you got to get back into normal market conditions before you kind of can call that.

Got it. Thanks for taking the questions.

Thank you. Thanks, Jacob.

Thank you. And the next question comes from Connor McNamara with RBC Capital Markets.

Hey, good morning. Thanks for taking the call. Just first on margins, if you look at your margin guide for this year, it will imply a second half margin well below 15% or so. How should we think about that going into next year and how quickly can you get back to pre-pandemic level EBIT margins?

Obviously, as I've started, I've spent a lot of time getting into details on our margin and most importantly, understanding what the actions we're taking and what we need to continue to do. You can see in our guide that we'll be stepping up in the fourth quarter, right from where we were at a low point in 3Q. But I think there's still a lot of work to do to understand where we are in 24. You know, certainly I think we'll be able to improve, but right now, you know, we're not going to issue guidance yet on our 24 gross margins. Okay, thanks.

And just on the pharma order strength, how much of that strength was from new customers versus continuing projects and just You know, what's different than what you talked about three months ago in relation to pharma spend?

Yeah, you know, we could see, Connor, right in Q1 that pharma spend dropped off just a little bit, but it wasn't a trend. And then in Q2, it was really weak. I think what we were able to do in Q3 was the high probability funnel that we talked about on our Q2 call, we were able to close out on that. And what we saw was existing customers um some new but i would say majority of your existing customers uh moving forward with phase three and commercial uh projects and placing large orders um with deliveries in in kind of the first quarter second quarter of next year so i think it's very encouraging that the order pattern has increased i'd like to add that you know having essentially finished the month of October, right as of today, we can say that the order strength has maintained itself through October. So again, another data point that I think is positive for Repligen.

Great. Thanks for that color tone. Appreciate it.

Thank you. And the next question comes from Dan Arias with Stifel.

Morning, guys. Thanks for the questions. Tony, on the order book improvement, good to hear that come in the way that it did. Are you able to ballpark the percentage of the business where things actually improved? It sounds like it's pharma, gene therapy, not so much CDMOs. So if you were to sort of crystallize or simplify that, what might that look like, assuming you have that number handy?

Yeah, no, it's absolutely pharma and CDMO, or not CDMOs, but pharma and gene therapy. If you go back to what I said, we were 50% up on pharma on orders sequentially. We were 23% up on pharma on orders year on year. Our gene therapy strength in orders, again, was 50% year on year, 25% sequentially. CDMOs inched up a little bit in the quarter, but I would say CDMOs remain sluggish and have not really recovered from where we were. in Q3, you know, when it dropped off dramatically in Q3 of last year. So, you know, the way I look at it is, you know, if you add up kind of pharma and gene therapy in one bucket, that's probably about 50% of the revenue of the company is coming from those two buckets. And then, you know, somewhere between 40 and 50% is coming from CDMOs and what we call integrators slash OEM. And that side of the ledger just hasn't moved

Yeah, okay, that's helpful, thanks. And then maybe on chromatography, can you just touch on resin availability there? And at this point, whether you think that you might start 2024 off with that just no longer being a constraint, that seems like an area where growth next year can be about more than just the backdrop, the industry backdrop. So curious about the way in which you're thinking about starting off 24 in that particular segment, thanks.

Yeah, there's no doubt that resin availability has continued to improve as we've gone through the year. I think the piece for us that's maybe changed is it's hard to predict what percent of our customers are going to ask us to procure resin to pack the columns, especially outside North America. And that's impacting the growth that we're seeing on the chromatography side. And when we look at like Q3, our volume is up, right? So when you look at the number of columns that we're producing and shipping, it's going up and it's gonna continue to go up. When we get into next year, I think you're right. I think resin availability should be less of an issue. I mean, I think it'll be normal For high-volume residents, it's probably going to be in that six- to nine-week period, but for much larger volumes, it's going to be probably closer to 12, 13 weeks. But again, that's really at the discretion of the big suppliers of residents. But yes, I agree. More visibility in 2024, and it should be back to a more normal year for our chromatography business. Okay, thank you.

Thank you. And the next question comes from Puneet Sudha with Lunica Partners.

Hi, Tony. Thanks for taking the questions. And Jason, great to have you on board. So, Tony, I just wanted to clarify. I think you said first half of 2024 sequentially should improve from second half of 2023 and then expecting that you are going to grow further from that in second half of 2024. I mean, it's fair to say that 2024 should grow versus 2023 is just hard to sort of quantify the magnitude. And I appreciate that. So I just wanted to clarify that. And then ultimately, do you think the 15 to 20% base business growth algorithm that you have for the longer term, is that still intact?

Yeah, maybe start with the 20% base business growth in the longer term. We see no reason why our business can't grow at that level. We have a highly differentiated portfolio of products. We're bringing new products to market. We're seeing traction in the field. We have less competition on a per product basis. So I think long-term and normal years for bioprocessing, we should be able to grow at that level. um when you talk about next year it's just you're right uh it's hard to quantify what growth could look like next year but remember what we're talking about is base business growth not all not overall um because remember we had some uh covet related revenue in uh in 2023 but yeah look when we get to the february call we'll obviously be telling you exactly what 2024 is going to look like. And we'll probably, you know, when we get to the, you know, three, four months from now, we'll have a much better idea as well about the order run rate. Order run rate is what's key to the growth. And, you know, I think we're happy that, you know, Q3 finished strong and the start of Q4 has been a good start to the quarter for us as well on orders.

Got it. And then, On the gene therapy side, just wanted to clarify, you know, when you look at the progression of sort of the phase ones to twos and how the products are getting approved and getting into the commercial, how they're getting commercialized, you know, are you feeling confident that, you know, sort of as we go into 2024, repulsion will continue to be levered more and more to later phases and later stages of the drugs and continue to see growth from that. I guess the main question is sort of the sustainability of the gene therapy progress that you're seeing here and sort of how much of the order book contribution is really sort of coming from gene therapy versus MABS. Thank you.

Yeah, I think on gene therapy, we're a little bit of a proxy on the industry. Remember, we were in early. We're well embedded in small, medium, and large gene therapy accounts. So as the progression happens from phase one to phase two to phase three to commercial, we should follow that path very much in parallel. I can't tell you what it's going to be next year because I think you still have to see what happens with drugs that are up for approval this year. But if you take like the top 25 accounts, they're all scaling and the average dollars spent at those accounts is going up. So I think that's also a really positive sign for us.

Got it. Okay. All right. Thanks, Tony. Yeah, thanks.

Thank you. And the next question comes from Matt LaRue with William Blair.

Hey, good morning. If I think about some of the differences between perhaps your CDMO customers relative to pharma or gene therapy, is there anything to call out, whether it's modality exposure, control over pipeline, perhaps different level of inventory stocking and now destocking, you know, regional exposure? Anything that might point to why there's sort of that discrepant recovery right now?

Yeah, I think on the CDMO side, there was clearly a lot of inventory build, and I think that's a big part of what's going on. There is a lot of activity happening at CDMOs. We do expect that as we finish off the year and we get into next year, CDMOs are going to improve. We're having lots of conversations. There's a lot of projects out there. We kind of have to close them. And I'm just talking about Repligen, Matt. I'm not talking about the market in general. But we have some opportunities on CDMOs. We've got to do some execution over the next couple of quarters, and that should really help us in 2024.

Okay, thanks. And then on China, you know, sort of another couple months since we last spoke to observe what's going on there. anything to update, either from a competitive perspective, macro perspective, or customer perspective?

Yeah, on the macro side, not a whole lot has changed. It's still a tough environment. I think you hear it from all the players on the life science tools side talking about what's going on in China. We don't expect any recovery until we get into next year. There's a few pockets of goodness, but it's just counterbalanced by stuff that's not happening. So yeah, China hasn't changed much at all over the last three months.

Okay, thanks. Thank you. And the next question comes from Matt Hugh with Craig Hallam Capital Group.

Good morning. Congratulations on the improvement that you're seeing and thanks for the update. Maybe first off, kind of digging in a little bit more on the destocking. Would you say that we're pretty close to being done with that process as you speak to your CDMO customers? And at this point, is it more a function of some of the funding and just some of the conservatism by some of their pharma customers? Or what do you think is maybe the holdup there?

I do think destocking is getting better. but it's still there. And I think it's gonna take the rest of the year to kind of get out of the hole that we're all in on dealing with high levels of inventory. I think your second comment is definitely accurate, which is there's been conservatism on the pharma side. And I know projects have been delayed. We talked about it in Q2. There was definitely project delays And I do think that that is something that kind of hurts the overall industry. What's encouraging is that Q3 bounced back much stronger than we were anticipating, especially within pharma. And you would expect that that should flow across into CDMOs over the next couple of quarters as well. So we'll see how it goes. I think we're cautiously optimistic.

That's great. Thank you. And then I realize it's very early days, but a month in or so on the MetaNova acquisition, how's the integration going? What has the feedback been from your customers? Those types of things. Thank you.

Yeah, on Metanova, it's been very straightforward. The majority of their business is stainless steel. They call it a reuse business. That's a different channel than we sell through, so we've been working very closely with the leadership team at Metanova, meeting with their channel partners. We've got some meetings next week with a larger group of channel partners, so expect that that business is right on track to hit the numbers we're expecting it to hit in Q4, on track for next year. I think the big part that we have to do over the next 12 months is take the technology that they implemented in the stainless steel format and start to move that across into single use, marry it up with the bag technology that we have from FlexBioSys, and really become a bigger player in the single-use bag side of the market. So that's kind of our goal. We kind of have to keep two sides of the equation running, and we're really happy with what we have and what we can accomplish.

That's great. Thank you.

Thank you. The next question comes from Tim Daly with Wells Fargo.

Great, thanks. So, Tony, to two earlier questions on orders, you called out order strength has maintained itself through October. And then to another question, you called out CDMO integrator OEM customers' orders haven't moved. So, just want to confirm those are both, you know, could be interpreted on an October basis as well as a quarterly basis.

Yeah, I have not, Tim, gone and looked at the October orders by kind of segments. I'm just talking about total orders in in October have remained strong, but I haven't done an analysis to see, you know, is that exactly the same pharma versus CDMO that we saw in Q3? All right.

That's helpful, but okay. And then just thinking about pricing, You know, was there any, you know, use of promotions or discounting or anything in the quarter? Um, you know, has that stepped up? Well, I guess what was pricing in the quarter? Um, or easier way to, I guess, ask this was the apples to apples price increase in revenues, um, higher than the price increase in orders.

Yeah, I would say that, you know, through, especially at the end of Q3, we typically run a promotion on some of our small benchtop systems. We've done that in prior years. You'll see that on our website. That's a pretty standard kind of tactic that we've used in prior years. Nothing different in 2023 versus what we've done maybe two, three years ago. And I would say price, Jason, it's maintaining towards that kind of 4% or 5% range for the year. So I think we're on track for what we said we were going to do in price at the beginning of the year. And I don't think any of the smaller promotions that we're running really impact price for the year.

All right. Great. Thank you.

Thank you. And the next question comes from Rachel Vaynesdale with J.B. Morgan.

Great. Good morning. Thank you for taking the questions. And so I wanted to follow up on some of the earlier comments around gene therapy. Obviously, you saw some nice strength there this quarter. We're getting a number of questions just on that DRUPTA data that was released last night where Embark failed to meet its primary endpoint. So can you walk us through how meaningful the customer is to DRUPTA and how big of a contributor was that for 3Q for orders and revenues? And then going forward, how does the Embark data and, you know, that failure there change anything in your gene therapy expectations going forward?

Maybe I'll start with the second part of your question. So I saw the same reports probably as you did, and I think it's really early. I'm sure the results are disappointing, but there's still a submission that has to happen to the FDA. And I think we should all sort of wait to see how that all plays out over the next couple of months. We don't comment on which drugs we're in. I think what we said And I'll probably reiterate, we're in the majority of the commercial approvals that happened this year. But we have, you know, 20, 25 accounts right now that are tracking well in terms of scale up. And you're going to see bumps in the road. And I think when we get to next year, I think it'll be clearer, you know, where some of the drugs have got approved this year, what their volumes might be in 2024.

Got it. And then just wanted to follow up on some of the comments around order book trends. So nice to see that orders grew 13% sequentially this quarter. Can you just walk us through the monthly exit rates on that order strength? And then you mentioned that order strength has continued into October. So can you clarify what that means? Was that a continued step up in orders, meaning growth beyond 13% sequential, or is that really stable to the 13% that you saw this quarter?

And Rachel, just to be careful, your first question was monthly trends in the quarter. Is that what you said?

Yeah. Yep. So exiting like what were order rates in September, for example.

So I would say that that July, August, and September that each month got better. We had a very strong September. October, if you looked at kind of the average for the year, it's well above what we've seen in other months, but not September. We had a very strong September, as we said in my prepared remarks. Second half of the quarter, orders picked up. We've maintained a strong order trend in October. But I'm not going to comment on, hey, you know, four weeks in October is better than, you know, four weeks in July or four weeks in August. It's significantly better than what we were seeing in Q2.

Perfect. That's it for me. Thanks, you guys.

No problem.

Thank you. Thank you. And the next question comes from Dan Leonard with UBS.

Thank you. First question on 2024 framing. I appreciate it's early to guide 2024 gross margin, but Jason, you mentioned that margin should improve. And was that comment made using the second half of 23 as a baseline, or would you expect gross margins to improve from the full year 2023 result?

Yeah, so certainly versus the second half of 23. So again, a lot of similar framework that Tony's talked about for revenue. Again, we continue to try to appropriately right-size the company. We feel that we've got a path to improvement, but again, it's just an early read in terms of what that looks like for the year in terms of the guide, but certainly a step up from where we were in the second half of 23.

Understood. Then I have a follow-up on China. Tony, I was wondering if you could comment on order trends in China specifically and reflect on how important is that region to the long-term growth algorithm of Repligen?

I think it's clearly important. You know, China orders last year or China revenue last year represented about 10% of our total business. But remember, about a quarter of that came from COVID. So three quarters came from what we call base. So it's easy to do the math. It's about 60 million. We'll be down probably 20%, 25% this year on base. And we just need to move back into recovery. It's not a huge number, but it's an important region and we want to do well in the region. And I think we have a really good portfolio of products that are differentiated and there's no reason why we can't grow. And we're not overly concerned about local competition. It does exist. And what really needs to happen is the macro environment needs to get better. We have a lot of accounts there that we work with that we like that like Repligen. So expect that, you know, when China turns, it should be an improvement for us as well. And, you know, orders, have remained light in the, really, you know, all through this year, it's been, the order trend has been light. We've had a, we had a strong order backlog going in, coming into 2023, which made the revenue numbers for China in Q1 and Q2 were much better than what we were bringing in versus orders. So it should get better as we, move through 2024, but it's all macro driven.

I appreciate that. Thank you.

Thank you. And the last question comes from Justin Bowers with Richard Bank.

All right. Good morning and thank you. Just one on the cadence centering 2024. Is the 4Q Exit rate, sort of a good jumping off for 1Q and 2Q of next year.

From a revenue point of view, from a margin point of view, from both?

Yes, from a revenue point of view.

Yeah, I think, yeah, so the one thing that Q4 has that Q3 and Q2 didn't have is COVID. So I think when we get to our Q4 results, I think the base business in Q4 is a good jumping off point, which will be improved versus Q3. So we're expecting that things will get better as we move into Q1 and Q2 next year. And I think that's also reflected, Justin, in the fact that a lot of the orders that we're talking about that we got at the end of Q3 and here in early in Q4 are going to get delivered in the first or second quarter next year.

Got it. Thank you. And the gist of that was just, you were referencing growth, you know, growth over one half of this year versus second half of this year. So I just wanted to just clarify the quarterly cadence.

Yeah, but it's base business.

Yep. Got it. And then just, okay. And then just in terms of orders and I know the business has transformed quite a bit. Um, you know, over the last few years. But is there, when you look across your accounts, are there differences in order patterns or certain seasonality just, you know, either by account or by geography? I mean, we see that in some of your peers. And just also noting that you do have a unique and different mix of business, but at a high level, Is there any way you can characterize sort of like the seasonality, whether it's by customer or by geography on sort of a normalized basis as such a thing exists anymore?

Yeah, it's a great question. I would say that this is not an, we know it's not a normal year. So trying to really draw conclusions on order patterns. in what's been like a topsy-turvy year between, you know, inventory build and destocking and then conservatism on capital spend and delayed projects. I think the way I look at it, Justin, is a little bit like, you know, are we beginning to see improvements in our funnel, right? And that is what's the most encouraging piece for me is that, you know, even though we've had a good order quarter in Q3, we've been able to replenish that 50% and above probability funnel in the same time period. So that's what's encouraging is that there's more opportunities moving through, which is spread across pharma and CDMO and integrators. So that's what I'm looking to see, you know, what progress do we make in Q4? What progress do we make in Q1? I think trying to draw a conclusion on order patterns as we've gone through this year isn't going to tell us a whole lot about what the future is going to look like.

Got it. Okay. Thanks, Tony.

Thank you. And the next question comes from Brendan Coyar with Jefferies.

Hey, thanks. Good morning. Jason talked about some ski rationalization plans. Can you just touch on which segments that will affect and whether it will be a headwind to revenues? I imagine that's not for programs that are already commercial, but any more color. I'll share on that. Thanks.

Yeah, Brandon, it's really just focused on the COVID-related, you know, business that we have. So it's at a skew level that whether it was COVID or demand is no longer there. So nothing that affects any go forward from a base business perspective.

Mainly filtration.

Okay. Tony, what do you expect the cell gene therapy customer base to do in terms of revenue growth in 2023 now? I think that had been flat. I'm just curious if that changed.

I think, and I don't have the exact number, but I would say it's probably flat year on year, which is not bad considering the risk the market's been this year.

Thank you. And this concludes our question and answer session. I would like to return the conference over to Tony Hunt for any closing comments.

Great. Thanks, everybody, for joining us. Look forward to chatting with everybody in a few months' time and hopefully close out 2023 and talk about improvements in 2024. So look forward to catching up then. Thank you, guys. Thank you.

The conference has now concluded. Thank you for attending today's presentation. May God connect your lines.