Repligen - Q2 2024

Executive Summary

• Q2 2024 printed in line: revenue $154.07M and adjusted EPS $0.33, matching consensus; revenue missed by ~$0.04M; GAAP EPS was $0.06.
• Guidance narrowed: FY24 revenue to $620–$635M (midpoint -$7.5M); adjusted EPS unchanged at $1.42–$1.49; adjusted operating income cut to $76–$81M; tax rate lowered to 20%; other income raised to ~$24M.
• Orders strength as catalyst: Q2 orders $157M, book-to-bill 1.02; CDMO book-to-bill >1.4; new modalities orders +40% YoY; management expects stronger H2 with non‑COVID revenue +11% YoY and Q4 particularly strong.
• China is the swing factor: 2024 China revenue now ~4% (~$25M), -$10M vs prior view; team rightsized in the region; FX also a headwind.
• Stock reaction: positive H2 setup and tightened range drove a sharp move; media reported +16.4% on Jul 30 after the announcement.

What Went Well and What Went Wrong

• What Went Well

  • Orders momentum: total orders +20% YoY (+30% ex. Proteins); CDMO orders +20%+ sequentially and YoY; book‑to‑bill >1.4 at CDMOs.
  • New modalities strength: Q2 orders +40% YoY; H1 revenues >10% and orders >20% YoY; book‑to‑bill ~1.1.
  • Consumables and equipment recovery: consumables revenues up double digit vs Q1 and orders +30% YoY; equipment orders +20% vs last quarter and ~15% YTD; RS systems gaining traction (first RS10 placements).
  • Strategic positioning: pending acquisition of Tantti adds novel macroporous bead tech synergistic with Avitide and OPUS; expected breakeven on adjusted margins/EPS in 2025, accretive in 2026.
  • Quote: “We are confident in Repligen’s ability to resume above‑industry growth in the second half of 2024 and into 2025.”

• What Went Wrong

  • China deterioration: 2024 China revenue now ~4% (~$25M), -$10M vs Q1 view; rightsizing the team; Q2 China down 38% YoY; no recovery expected in 2024.
  • Proteins headwind: known ~$8M per quarter drag; 2024 Proteins revenue guided $67–$72M and expected rebound only in 2025; margins impacted by mix.
  • Profitability pressure: adjusted operating margin 10.1% (down ~8 pts YoY); adjusted EBITDA margin 15.2%; incremental incentive comp + volume inflation weighed; adjusted OI guide cut by $7M.
  • Seasonality: management flagged Q3 as the lightest quarter, with Q4 expected to carry the H2 ramp.

Transcript

Operator (participant)

Good day, ladies and gentlemen, and welcome to Repligen Corporation's second quarter of 2024 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key, then zero on your telephone keypad. 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. Please note this event is being recorded. I would like now to turn the call over to your host, Sondra Newman, Head of Investor Relations for Repligen. Please go ahead.

Sondra Newman (Head of Investor Relations)

Thank you, and welcome to our second quarter of 2024 report. On this call, we will cover business highlights and financial performance for the three and six-month periods ending June 30th, 2024, and we will provide financial guidance for the year 2024. Joining us on the call today are Repligen's current Chief Executive Officer, Tony Hunt, our Chief Commercial Officer, Olivier Loeillot, and our Chief Financial Officer, Jason Garland. 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 on 8-K, including the report that 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 are providing 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 Repligen's website and on sec.gov.

Adjusted non-GAAP figures in today's report include the following: base revenue and organic revenue, non-COVID and non-proteins revenue, cost of sales, gross profit and gross margin, operating expenses, including R&D and SG&A, income from operations and operating margin, other income, pre-tax income, tax provision, effective tax rate, net income, diluted earnings per share, as well as EBITDA, adjusted EBITDA, and adjusted EBITDA margins. These adjusted financial measures should not be viewed as an alternative to GAAP measures but are intended to best reflect the performance of our ongoing operations. Now I'll turn the call over to Tony Hunt.

Tony Hunt (CEO)

Thank you, Sondra, and good morning, everyone, and welcome to our Q2 earnings call. As you saw in our press release this morning, we reported on an improving quarter for both revenues and orders, with orders pacing 2% above revenues for the second quarter and 1% above revenues for the first half of the year. As outlined on our May earnings call, we were looking for continued momentum in Q2, and with the exception of seeing China demand decline further and the known headwinds in proteins and COVID, we had a really good quarter. We saw a positive Q2 in year-to-date sales and order performance in pharma and a healthy pickup in CDMO order activity. Sales and order momentum on consumables continued, and we saw a bounce back in equipment orders, both sequentially and year-over-year.

Finally, our momentum in the new modality space continued, with first-half revenues and orders well above the same period in 2023. We are narrowing revenue guidance within our range with the expectation that we will finish 2024 between $620 million-$635 million, which lowers our midpoint by 1%. This is directly related to the demand drop-off in China, where we saw a weak Q2, which is driving an additional $10 million decline versus our May call. We're also seeing increased headwinds coming from FX. But overall, we're really happy with the progress we're seeing, including the strategic direction being reinforced for proteins with pending acquisition of Tantti Lab that we announced yesterday. Moving now to the big picture on the quarter and the first half of 2024. Pharma revenues in Q2 were up about 15% sequentially and 20% year-on-year.

Pharma orders were also strong, up 5% sequentially and 40% year-on-year. For CDMOs, while Q2 sales were down as anticipated, orders, as noted earlier, came in strong, up by 20% plus both sequentially and year-over-year. Book-to-bill for CDMO was over 1.4 for the quarter and 1.1 for the first half of the year. This improvement was driven by an uptick in Tier-2 CDMO activity, which we view as an important turn for emerging biotech and the overall biologics market. We look forward to seeing how this plays out later in the year and into 2025. Consumables maintained their momentum in Q2 with revenues up double-digit versus Q1. Orders in Q2 were up 30% versus prior year and in line with our Q1 orders.

With consumable orders up 20% in the first half of the year, we are confident that destocking is finally behind us. Moving to capital equipment, similar to CDMOs, equipment was light on revenue in the quarter. We did, however, see first-half equipment sales up close to 10% versus the first half of 2023. More importantly, equipment orders showed a very nice rebound, up 20% versus last quarter and about 15% year to date on relatively easy comps. Supporting our order strength in H1 is the early success of our RS systems product line, where we have seen important wins at strategic accounts in Q2, including first placements of our most recently launched RS10 system. While the Q2 results are encouraging, there are still headwinds in this part of the market.

However, we still expect capital equipment orders to pick up further in the second half, as we have a very strong opportunity funnel that we expect to convert to orders. The new modality customer base delivered mid-single-digit revenue growth in Q2 versus the same quarter in 2023. New modality orders were up more than 40% year-over-year, delivering a Q2 book-to-bill of 1.1. First half of the year revenues were up greater than 10%, and more importantly, orders were up greater than 20% in the same period. This reflects the momentum we are seeing in this market and the strong portfolio fit for this customer base. Our regions continue to perform well with the exception of China.

China orders and sales were down again in Q2, and our expectation is that China revenues will now come in around $25 million in 2024, or about $10 million lower than we were anticipating at the time of our Q1 call. Jason will cover more in his finance section on regional dynamics. So in summary, total Q2 revenues decreased 3% year-over-year, but were up 4% if you exclude non-COVID and proteins headwinds. Sequentially, total Q2 revenues were up 2%. We continue to see some lumpiness on a franchise level from quarter-to-quarter, but sales through the first half of 2024 support our view that our franchises are recovering. Further validating this view is orders performance in the quarter and first half. Total orders in Q2 were up 20% year-over-year and up 30% if you exclude proteins. Sequentially, orders were up 5%.

Moving to our updated revenue guidance for 2024. As noted earlier, we are narrowing our guidance to a range of $620 million-$635 million, reflecting the incremental headwinds from China and foreign exchange. We are encouraged that our businesses are performing as expected, and we achieved our revenue targets in the first half of the year. Orders held steady, supporting a first-half book-to-bill of 1.01 and higher in important market areas like CDMOs and new modalities. Our opportunity funnel continued to strengthen as we moved through the first half of the year. The funnel is up significantly versus the same period in 2023. Our healthy funnel was reflected in our orders performance for the quarter and is another lens to support our view that the markets are more fully recovering as we move into the second half of 2024.

With the positive uptick in orders and funnel strength, along with improving visibility, we expect the second half of the year revenue to be stronger versus first half. We also expect to see a return to robust revenue growth in the second half of the year, with non-COVID revenues projected to be up 11% versus the same period in 2023. We expect Q4 to be an especially strong revenue quarter given the funnel and the known seasonality challenges associated with Q3. Based on these market trends and our healthy funnel, we believe we are finally seeing the turnaround in the markets, and we are excited about the momentum going into 2025, where we expect to continue to grow above market. I'll now hand the call over to Olivier to talk about her franchise performance and the commercial efforts to develop a key account program.

Olivier Loeillot (Chief Commercial Officer)

Thank you, Tony. Let me provide some quarterly highlights for each of our franchises. Starting with proteins, where the known headwinds of $32 million have not changed over the last six months, we are still expecting this franchise to deliver $67 million-$72 million in revenue this year. While 2024 will be a down year for proteins, we are very optimistic about a solid rebound in 2025 based on the new protein array we launched with Purolite in the mAb space and the impact of the Tantti technology in new modality markets. The pending acquisition of Tantti is a strategically important technology play for the company. It allows us to combine Tantti's macroporous bead technology with the affinity content from Avitide and our prepacked OPUS columns.

Because we've already been working with Tantti scientists for a couple of years, we expect to be able to launch our first resins under Tantti's DuloCore brand as soon as quarter four. So exciting time for this franchise as we build out a best-in-class affinity resin portfolio to disrupt and take share in both mAb markets with Purolite and new modality markets with Tantti. Our filtration franchise continued to perform well, with revenues up mid-single digits in Q2 and excluding COVID, up almost 10% year-to-date. Total orders have also been robust, up greater than 20% year-to-date. Strength in the business is coming from ATF, TangenX flat sheet cassettes, and systems. Total ATF systems revenues were up greater than 50% in the quarter and 40% for the first half of 2024. In Q2, we saw accelerating demand for TangenX, which was up 30% year-over-year.

The flat sheet cassette uptick is another sign that destocking is behind us as we have a broad customer base spanning CDMO and pharma. Finally, ARTeSYN Systems had another strong quarter where we continue to differentiate ourselves on systems with integration of CTech Flow Analytics technology. Moving to chromatography, while our total chrom revenues were slightly down year-on-year, we saw sequential growth of about 10%. The most significant piece of the franchise, our OPUS portfolio, showed positive signs of recovery, with revenues up high single digits in the quarter and mid-single digits for the first half of the year. Otherwise, we saw a significant increase in chromatography demand, up greater than 50% in the quarter, nearly 20% sequentially, and up 15% year to date.

For OPUS, orders in the quarter and first half of the year have been robust, up greater than 20% through the first six months of 2024, driven by strength in new modalities. On top of this, our chrom systems had a strong quarter on orders as we continue to see traction for our ARTeSYN product line in the field. Our analytics business had a nice pickup in revenues versus Q1 and was up mid-single digit year over year. We continue to focus our efforts on new modality adoption and promoting the Flow technology as part of our ARTeSYN System product offering. Finally, a big area of focus for me over the last nine months was building out our key account strategy for the company. I am delighted that our key account management team now covers 20 of our top accounts.

We are very happy about the impact it has already had in 2024 and believe it will be key to our growth in 2025 and beyond. We had numerous meetings with Pharma C-suite team to present our most recent innovations and broad product portfolio. The feedback is very positive, especially on the depth and breadth of what we now bring to the table. A key for me as I move into the CEO role is to maintain the focus on innovation and impact of disruptive technologies in our markets and make sure that we have increased visibility at a senior level across our customer base. We expect this, in combination with our funnel of opportunities that are moving from early to late-stage clinical and commercial, will be the catalyst for sustained long-term growth consistently above the market growth rate.

Now, I will turn it back to Tony to wrap up the business section.

Tony Hunt (CEO)

Yeah, thanks, Olivier. So in summary, we've completed a solid first half to 2024 with revenues right in line with our expectations and orders tracking ahead of revenues by 1%. We are encouraged by the continued strength we're seeing in pharma, consumables, and new modalities, and by the positive uptick we saw in CDMOs and capital equipment in Q2. There's still a lot of work to be done, but we're excited about moving back into growth mode in the second half with projected non-COVID growth of 11% at midpoint of our guidance. We remain confident about 2025 as many of the one-time headwinds facing Repligen here in 2024 will be behind us. On a personal note, I would like to thank our employees, customers, and investors for giving me such support over the last 10 years. It's been a brilliant experience.

When I look to the future, I'm very confident about the success of Repligen, and the company is in very capable hands with Olivier at the helm. Now I'll hand it over to Jason for the financial update.

Jason Garland (CFO)

Thank you, Tony. Good morning, everyone. Today, we reported our financial results for the second quarter 2024, and I've updated our financial guidance for 2024. Revenue in the second quarter was up approximately $3 million sequentially from the first quarter as we delivered revenue of $154 million. This is a reported decline of 3% year-over-year, or down 5% on an organic basis. Recent acquisitions contribute 3% of our reported growth, and currency and COVID created about a 2% headwind. Excluding proteins, with a known headwind of approximately $8 million per quarter, our other franchises grew 3%. For the first half of 2024, we reported $305 million of revenue in line with our expectations. First-half revenues decreased 11% year-over-year, but were up 5% if you exclude known COVID and protein headwinds.

As Olivier shared color on our franchise performance, I'll provide more detail on the performance across our global regions. In the second quarter of 2024, North America represented approximately 50% of our global business, while Europe represented 36%, and Asia-Pacific and the rest of the world represented 14%. Within Asia, China was down 38% versus the second quarter of 2023 and represented 4% of our total business in the quarter. North America grew year-over-year on strength across all franchises except proteins, and Europe was down 3%, driven entirely by the decline in affinity ligands. All regions are up high single digit to low double digit on orders in the first half of 2024, with the exception of China. China was down more than 20% in the first half of the year and almost 30% when you compare first half of 2024 to the second half of 2023.

We have seen no signs of recovery and do not expect to see a turnaround in 2024. Based on our first-half performance, we now expect China to be approximately 4% of our worldwide sales versus our previous range of 5%-6%, which essentially drives $10 million of our drop in revenue guidance. Second quarter 2024 adjusted gross profit was $76 million, a $4 million decrease year-over-year on $5 million of lower revenue. With this, we delivered a 49.6% adjusted gross margin. This is down 60 basis points versus last year, driven by volume and incentive compensation headwinds, mostly offset by year-over-year productivity. That said, it was sequentially up 100 basis points from the first quarter. First-half 2024 adjusted gross margin was 49.1% and remained consistent with achieving our 2024 full-year guidance of 49%-50%.

Continuing through the P&L, our adjusted income from operations was $16 million in the second quarter, down approximately $14 million compared to prior year. The majority of this decline was driven by $9 million of incremental incentive compensation, and the remaining from volume and inflation partially offset by some price improvement and productivity savings. Sequentially, our adjusted operating expenses were down $1 million from the first quarter, and we are executing an estimated 7% further reduction of adjusted operating expenses in the second half versus the first-half run rate. While this is a meaningful reduction, we have also increased our investments in the commercial team to add more critical key account resources. We're also seeing that the impact of some of our cost reduction initiatives will move to later in the year. Therefore, we are updating our full-year guidance to reflect an additional $3 million of adjusted operating expenses.

Our second quarter 2024 adjusted operating income margin improved sequentially by approximately 200 basis points to 10%. On a year-over-year basis, adjusted operating income margins are down roughly 8 percentage points, driven by the increase in incentive compensation noted earlier and lower volume, with some offset from year-over-year cost reduction initiatives. Our second quarter 2024 adjusted EBITDA margin rate was approximately 15%, which reflects a 5 percentage point drag from depreciation. With cost optimization and margin expansion remaining a priority, we expect to continue to execute programs and evaluate the need for future optimization and restructuring actions. That said, we incurred less than $1 million of restructuring charges in the second quarter. Adjusted net income for the quarter was $19 million, down $11 million versus last year.

This was driven by the $14 million drop in adjusted operating income, offset by greater than $1 million of higher interest income net of interest expense from improved interest rates on our cash position, and it includes approximately $1 million less adjusted tax provision. Our second quarter adjusted effective tax rate was 18.1%, which includes a discrete benefit from stock-based compensation. Given the first-half run rate, we are updating our total year adjusted effective tax rate outlook and expect it to be approximately 20%, down from the prior guidance of 21%. In addition, we believe that the continued strength of our cash balance and interest rates will allow us to increase our adjusted other income outlook by approximately $6 million. Adjusted fully diluted earnings per share for the second quarter was $0.33, compared to $0.53 in the same period in 2023.

Finally, with a strong generation of cash flow from operations in the quarter, we increased our cash position to $809 million, up $29 million from the first quarter and up $58 million from the end of 2023. I'll now move to an update on our guidance for the full year of 2024. I'll speak to adjusted financial guidance, but please note that our GAAP and non-GAAP reconciliations for our 2024 guidance are included in the reconciliation tables in today's earnings press release. And for further clarity, our guidance is fully inclusive of the FlexBiosys and Metenova acquisitions we made in 2023, but excludes any impact from the pending acquisition of Tantti. As highlighted earlier by Tony, we have updated our total year adjusted guidance ranges that we shared in February and April.

While we were maintaining guidance within our range, we now expect total revenue in 2024 to be between $620 million-$635 million. We expect year-over-year revenue growth in the second half of the year. At our guidance midpoint, we expect total revenue growth in the second half of 2024 to be 8% year-over-year and non-COVID revenue growth to be 11%. Overall, for the full year, we expect 2%-5% of growth for our non-COVID business, with M&A contributing approximately 3 percentage points of that growth. We still expect to deliver adjusted gross margins in the range of 49%-50%, essentially flat to 2023. We now expect our adjusted income from operations to be between $76 million-$81 million, or 12%-13% adjusted operating margin rate, down $7 million and down 1 percentage point from our prior guidance, respectively.

$4 million of the $7 million decline is coming from lower volumes associated with our revised revenue guidance, and the remaining $3 million is coming from the increase in adjusted operating expenses discussed earlier. With a first-half adjusted operating margin of 9%, we expect to be able to reach the 12%-13% through both volume leverage and from further operating expense cost reductions in the second half. Adjusted EBITDA margins are now expected to be in the range of 17%-18% for the year, reflective of the exclusion of roughly 500 basis points of fixed depreciation cost from capacity expansions we have made. As discussed earlier, we expect our adjusted other income to now be approximately $24 million, and our 2024 adjusted effective tax rate is now expected to be an estimated 20%.

With these improvements in adjusted other income and adjusted effective tax rate, we were able to offset the adjusted operating income reduction, and we are holding our guidance for adjusted net income at $80 million-$84 million and our adjusted diluted earnings per share of $1.42-$1.49. In closing, we are encouraged by the momentum we are seeing in the market coming out of the second quarter. We believe that our focus on key accounts, delivering on innovations, continuing to acquire differentiated technologies like Tantti, and executing on our revenue and profitability goals sets us up well for a successful exit to the year and into 2025. With that, I'll turn the call back to the operator to open the lines for questions.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you're 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 two. We ask that you limit yourselves to one question and one follow-up only. At this time, we will pause momentarily to assemble our roster. The first question comes from Rachel Vatnsdal of J.P. Morgan. Please go ahead.

Rachel Vatnsdal (Executive Director)

Perfect. Good morning, you guys. Thanks so much for taking the questions. So my first question is just around the order book. It's great to see some of this continued progress on the order intake, especially within the CDMO customers. You've been vocal about some of that lumpiness that you had been seeing on the CDMO side, and today you called out a book-to-bill of over 1.4, and I believe you said order growth of over 20% within CDMOs as well. So can you unpack for us what really drove that strength in the CDMO market, and how durable do you think some of this strength is? And then within those CDMOs, are there any areas that are rebounding faster, whether that's consumables or equipment or certain modalities as well?

Tony Hunt (CEO)

Yeah, thanks, Rachel. Yeah, look, in general, I think when we look at our book-to-bill over the last four quarters, we've been very consistent as a company. It's been around one, not a little higher than one. I think the average over the last four quarters has been 1.04. So I think we've shown some consistent results. We talked at the end of last year about having the first quarter in 2023, where we actually saw really strong CDMO activity that was in Q4. And that came from our top 10 CDMOs. So there was really strong order quarter in Q4 of last year. We had a lighter quarter in Q1, where we had a couple of the large top 10 CDMOs who are down on their ordering pattern versus what we've seen in the past. In Q2, it was a little different.

In Q2, for the first time, we saw the Tier-2 CDMOs come back. If you looked at the last six quarters, the Tier-2 CDMOs had been flat. Basically, we were ordering the same amount quarter after quarter, but not seeing any uptick. It was really encouraging that the growth we saw in CDMOs in Q2 did come from the Tier-2 CDMOs. If you look at it, two of the last three quarters have been very encouraging for CDMOs. Q1 has been light. I think the next couple of quarters will tell us a lot. Just as an aside, the strength we saw in CDMOs coming from the smaller CDMOs, we also saw a similar pattern in the pharma biotech space.

So again, another kind of encouraging sign that the long tail of accounts that we have and everybody else has in the industry is beginning to show some light.

Rachel Vatnsdal (Executive Director)

Great. And then just on my follow-up, for seasonality, you'd called out some seasonality in the prepared remarks for 3Q. And we've heard some varying comments on seasonality across your peers that have reported so far. So could you walk us through what are you guys assuming in terms of sequential revenue growth into 3Q and then sequential revenue growth into 4Q as well? And then more broadly, can you just remind us, what do you consider normal seasonality throughout the year for Repligen? Thank you.

Tony Hunt (CEO)

Yeah, so maybe the last part of your question, the seasonality for Repligen and for our industry tends to be strong Q2, very strong Q4, lighter start to the year with Q3 typically being the lightest quarter. Now, that's been weird for the last few years, but if you look at it over the course of 10, 15, 20 years, I don't think there's anyone in the industry in bioprocessing that wouldn't tell you that Q3 is typically the lighter quarter. I think we're back to more of a normal year. If you look at our performance this year, first half of the year, ex-COVID, ex-proteins, where we have this protein headwind, we're up 4% on revenue. If you go into the second half of the year, we're calling the second half of the year as 11% growth ex-COVID for Repligen.

Even without COVID, we're going to be up 8% at our midpoint. I think that's a really positive slide for us. We do expect Q4 to be a very strong quarter. We had a strong funnel. We had a lot of orders that came in in Q2 that are going to ship out in Q4. We're definitely heavily weighted towards Q4 versus Q3.

Operator (participant)

The next question comes from Dan Arias of Stifel. Please go ahead.

Dan Arias (Managing Director)

Hey, good morning, guys. Thanks for the questions. Tony, new modality orders up 40%. That's pretty solid. Do you think that that says something about where the industry is in terms of improvement, or is there a sensitivity to individual projects or customers that kind of makes it less of a broad-based comment? And then relatedly, do you have at this point, do you have a cell and gene therapy growth forecast for the year?

Tony Hunt (CEO)

Yeah, we haven't put a cell and gene therapy forecast in place for the year. Dan, if you might remember, we've moved cell and gene therapy into a new modality. So it's cell and gene therapy, mRNA, exosomes, everything that you would put in new modalities is what we're capturing overall when we talk about the growth. So when we look at last year and this year, I would say the biggest strength for us has been our top 25 accounts. It really hasn't been the long tail of cell and gene therapy and new modality accounts. It's really been the top 25 who've been scaling. And that's what we saw in Q1. That's what we saw in Q2. Having a book-to-bill that's slightly above 1.1 was very encouraging for this space. But the growth is coming from late-stage commercial. And I'm not sure, Olivier, if you want to add anything to that.

Olivier Loeillot (Chief Commercial Officer)

Yeah, no, we'll be seeing benefiting from those late-stage and commercial drug moving forward. And as Tony mentioned, our first-half revenue were up more than 10%, and the other were up more than 20%. So we really have great traction on these new modalities across the board right now, Dan.

Dan Arias (Managing Director)

Okay, helpful. And then, maybe Jason, generally speaking, when it comes to forecasting, do you feel like predictability is getting better here? I mean, destocking's run its course. Small and mid-biotech are no longer in freefall. So obviously, we'll have to see how the back half shakes out. But come the fall, we're all going to be trying to dial in 2025. And so I'm just kind of curious whether you're more optimistic that as you start to talk about 2025 and the outlook there, that the error bars around that outlook for next year should be tighter, visibility can be better, and so therefore, I guess the idea would be that an initial forecast just has a better chance of being the one that you finish with.

Jason Garland (CFO)

Yeah, look, I mean, as we continue to see more of the green shoots and the positive signs, that gives us just, again, an overall, I'll say, higher confidence in what we're seeing in the market. We've also talked about the growth in our funnel, right, in our opportunity pipeline. And then also, as we've kind of normalized back to a more traditional backlog, right, going into a quarter and going into the year. So I think all of those elements help give us better visibility, and certainly, we'll have more of that as we exit 2024 and go into next year.

Operator (participant)

The next question comes from Jacob Johnson of Stephens. Please go ahead.

Jacob Johnson (Equity Research Analyst)

Hey, thanks. Good morning, and Tony, congrats on a great run. On China, we've heard kind of muted commentary around that end market, but you guys kind of called out incremental pressures. Can you just unpack what you're seeing there? And then I'm just curious on China, given this will be 4% of your business this year, much smaller exposure than previously. Does that change your strategy around that end market?

Olivier Loeillot (Chief Commercial Officer)

Thank you, Olivier, I'll be taking this question. I think we can really further detail the rationale in order that we went through Q2. And the forecast from our team is pretty soft for the second half of this year, which is why we've decided to reduce our guidance expectation by $10 million. And this is really coming from China. So we've taken some action down there. We've even decided to right-size the team in the region. And we're now looking like we will land probably around $25 million in 2024. So it's a significant drop for us this year versus last year for sure.

Jacob Johnson (Equity Research Analyst)

Okay, got it. And then maybe just Jason, on margins and kind of pacing in the back half of this year, you talked about, I think, another 7% to come out in 2H. Can you just help us on the timing of that between 3Q and 4Q as we're thinking about modeling OpEx in the back half?

Jason Garland (CFO)

Yeah, definitely. Look, I mean, for margins, we've been continuing to drive the optimization and cost-saving activities that we've talked about, right, our RPS programs, site consolidations, being very diligent on our spending. And so you saw some of that improvement already, right, in the second quarter versus the first quarter. We went up in both gross margin and then also the operating margin. Gross margin is already tracking at the total year guide in 2Q and expect that to kind of stay there, maybe a little higher in the fourth quarter as that goes more to the high end of the range that we've given, maybe slightly above. And then as we continue to take actions and see the benefits of the actions that we've taken that are already in play at the operating expense level, then again, we kind of see that step again in third quarter.

Then fourth quarter, again, when you look at the overall guide we've given from a revenue profile, that's where you'll really see a bit higher leverage that you get into the fourth quarter. Step up in three and then a bit more in the fourth quarter. And that'll get us to around that 12%-13% up margin for the year. And again, that's really driven by both volume improvement and the volume leverage you get with that, as well as the operating expense reduction. Continue to execute.

Operator (participant)

The next question comes from Puneet Souda of Leerink Partners. Please go ahead.

Puneet Souda (Senior Research Analyst)

Yeah, hi guys. Thanks for my questions. And Olivier, congrats. Great to have you on board, and Tony, it's been truly a pleasure working with you over the years. So my first question is on CDMOs. Tony, can you tell a little bit more about what is driving the growth behind the CDMOs? You pointed out growth in Tier-2s. Is it biotech funding? Is it modality specific? We continue to hear about some facilities being underutilized and rationalization going on in facilities. So just want to understand the dynamics here and how much of this is maybe the new modalities running through CDMOs and maybe the DMD drug picking up.

Tony Hunt (CEO)

Yeah, so on the CDMOs, I would say that early days, right, so 2 out of the last 3 quarters looked good. One quarter was our top 10 CDMOs showing real order growth. And we're talking about orders here because revenue has been really light from the CDMO space. And then obviously, in Q2, it was more the Tier-2. So we're really encouraged that the Tier-2s have bounced back. We think it's a combination, honestly, of destocking finally being over, where a lot of the CDMOs either had inventory on hand or had a lower number of projects that were coming through. So there's been pickup in projects. There's been a pickup in activity. And we think that's encouraging. But obviously, we need to see a few more quarters of that as we go through the second half of the year.

Puneet Souda (Senior Research Analyst)

Okay, that's helpful. And then one of the questions we continue to get frequently is 2025. Could you maybe elaborate a jumping-off point from the fourth quarter? And is it fair to say with the guidance now lowered to flat for this year, is low teens to mid-teens the right way to think about it versus the 15% long-term, 15%-20% long-term growth that you had outlined previously?

Tony Hunt (CEO)

Yeah, good question, Puneet. I'll say the following, right? We're going to wait until the end of the year to talk about 2025. That said, second half of 2024, we're going to be up 11% ex-COVID. So I think that's very encouraging. We think our forecast or guidance that we've put in place for the year of the second half of the year is very achievable. We fully expect that when we get into 2025, we're going to grow above market. And so we'll wait until we get to the end of the year, and we'll give a lot more commentary on 2025. But obviously, very encouraged by kind of how we performed in the first half of the year. You can see where we're going in the second half of the year. And next year, we're confident about being above market growth.

Operator (participant)

The next question comes from Justin Bowers of Deutsche Bank. Please go ahead.

Justin Bowers (Equity Research Analyst)

Hi, good morning, everyone. So two questions, one on the opportunity funnel and then one more strategic. But could you talk about the funnel a little bit and how that's changed throughout the year and maybe how things paced in 2Q and early into 3Q?

Olivier Loeillot (Chief Commercial Officer)

Fantastic. Yeah, so the funnel continues to strengthen. I mean, our 50+ probability funnel is really up significantly year-over-year. We're really happy about that. But it's also increasing sequentially from quarter one to quarter two. But also the total funnel also keeps on increasing. So we are really happy about that. With some of the newcomers we had joining the team as well, we've built much more discipline in quantifying and accounting for those leads, which is giving us also much more visibility, let's say.

Justin Bowers (Equity Research Analyst)

Okay. And then in terms of strategy, you just made this acquisition for the resin beads, and you've had the partnership with Purolite a couple of years ago. Can you talk about how you're approaching that market and some high-level thoughts on the opportunity there and how that can contribute to growth over the next 3-5 years?

Tony Hunt (CEO)

Yeah, so I'll start, and I'll hand it over to Olivier for some additional comments. So nothing's changed in terms of our interaction with Purolite Ecolab now or going forward. Because the way we view it is that our partnership with Purolite is very much on the mAb side, and we're fully committed to that. And we've been launching products. In fact, in Q2, we launched a brand new Protein A resin that is high caustic, high capacity, and also protease resistant. So it's a unique Protein A ligand resin that's being launched, and we're very hopeful about how that's going to do in the marketplace. One of the things that we tried to do when we did the Avitide deal was Avitide was really going to be our way of moving in in a deeper way into the new modality space.

The challenge in the new modality space is that the majority of molecules in new modalities are very large molecules. They're like viruses. They're nucleic acids. They're viral vectors. It requires a very unique base bead structure. So the typical agarose beads that customers use or even suppliers use usually do not address the need for higher capacity and higher throughput that's required in this space. So a lot of times, people look at membranes, but then membranes have pretty low capacity. So when we started working with Tantti, we realized that the Tantti technology is the perfect combination of our Avitide content with the base bead that gives you the attributes that I just spoke about. So early days, very hopeful that this combination is really going to unlock the power of Avitide. But without Tantti, you can't get there.

So it's the two together that will be disruptive in the industry. I'm not sure, Olivier, if you want to add to that.

Olivier Loeillot (Chief Commercial Officer)

No, no, no. Yeah, because like you said, yeah, the new modalities require new purification solutions that do not exist yet. But also customization is very important because within those new modalities, every product requires a kind of very different technology. And our Avitide offering is very good because within three months, we can develop a new ligand. And within six months now with Tantti, we can have a full resin operational for customers. So we're very excited about that opportunity here.

Operator (participant)

The next question comes from Matt Larew of William Blair. Please go ahead.

Matt Larew (Research Analyst)

Hi, good morning. There was substantial capacity added throughout COVID by you and others in the industry. I think there was a perception in the investment community that because of the right size of pipelines and the funding environment, perhaps there would be a change to what historically have been very positive market forces in terms of the ability to pass through inflation, working with sole sources, etc. I'm just curious now, as you sort of emerge past destocking, what your sort of initial take is on the market forces going forward, again, whether that's on pricing, multi-source versus single source, your own competitive position, etc.

Olivier Loeillot (Chief Commercial Officer)

I think within the bioprocess product portfolio, there are a lot of different situations. I mean, and what I think Repligen is very unique about is with our innovation, when you look at the different product lines we are into, we don't have that much competition because of the innovative factors we're bringing to the table here. So having capacity available in progress, in fact, seems to be a real great opportunity because that will enable us to support our customer growing demand in the next few years. Then, obviously, if you look at some specific areas, and I would probably mention the single-use industry, there is definitely much more capacity available today. And probably this will generate a more competitive fight between the key actors in the field. But really, again, innovation is of excellence for Repligen.

Thanks to that, we are thinking having that available capacity can be a great opportunity for us.

Matt Larew (Research Analyst)

Okay, thanks. And then just maybe one more follow-up on the CDMO side. You referenced earlier broadly sort of equipment versus consumables. Just kind of curious, as a CDMO strength broadened to Tier-2, is what you're seeing in terms of equipment versus consumables and if that's perhaps indicative of new projects being started versus perhaps old projects being turned on? Any additional color there would be helpful.

Tony Hunt (CEO)

Yeah, maybe I'll start on it. I think on the CDMO front, when we look at capital equipment and we look at the orders that came in for capital equipment, because we had a lighter quarter on revenue for capital equipment in Q2, but orders were strong. It definitely spanned CDMOs and spanned pharma. I don't think there was a particular weighting towards CDMOs in the quarter versus pharma. I think it was just across the board. I think it reflects really the competitiveness of our RS product line, which is the ARTeSYN product line. It's something that we've been very focused on. So I don't think there's anything to draw in terms of whether capital equipment was stronger in CDMO versus pharma. I just think we had a healthy uptick in orders for the RS portfolio in the quarter.

Olivier, I'm not sure if you want to add to that.

Olivier Loeillot (Chief Commercial Officer)

Nope.

Operator (participant)

Our next question comes from Conor McNamara of RBC Capital Markets. Please go ahead.

Conor McNamara (Equity Research Analyst)

Thanks.

Just given some of the commentary in your prepared remark on improving funnel and orders relative to what you talked about in Q1, why did the non-China revenue guide not increase? Because everything sounds like the funnel is definitely improving. So how did that flow through to a guidance increase on the non-China business?

Tony Hunt (CEO)

Yeah, so good question, Conor. When you look at our guidance, you're right. The guidance sort of 1% drop-off midpoint is really coming from China. We think we put, honestly, the right guidance in place at the beginning of the year. Everything is holding. We believe we'll be in the range that we have outlined today. The only drop-off really is coming from China. We expect by the end of the year, we're going to be in that range. We're showing consistency from quarter to quarter, which I think is very encouraging. And we're showing, Conor, 11% growth ex-COVID in the second half of the year. I think that's really encouraging.

Conor McNamara (Equity Research Analyst)

Okay, thanks. Great. Thanks for that, Tony. And then just can you comment at all on the intra-quarter progression and activity? And if you can, what progress you're seeing so far in July?

Tony Hunt (CEO)

The intra-quarter progress, Conor, in Q2 or intra-quarter progress Q3?

Conor McNamara (Equity Research Analyst)

Q2 and how July's stacking up so far?

Tony Hunt (CEO)

Yeah, so Q2, I think, was, as you know, when we reported out at the end of April, we had a solid April. And then I think June was a little stronger. It was stronger than May, but there was nothing. They were all pretty consistent with June definitely being stronger than the first two months. And then July off to a solid start. I mean, we're still early days of the quarter. And typically, this is one of the later quarters, just simply because of seasonality and most of Europe's on vacation, or at least the month of August.

Operator (participant)

Our next question comes from Dan Leonard of UBS. Please go ahead.

Dan Leonard (Managing Director and Research Analyst)

Thank you very much. I have a follow-up question on sales phasing in the second half of the year. Can you clarify? You expect Q3 revenue to be down sequentially and also lower than Q1 revenue. Is that correct?

Tony Hunt (CEO)

No, we're not saying that it's going to be lower than Q1 revenue. We're thinking it's in that range of Q1 to Q2. It's definitely in that $150-$155 range. That's probably where we see it.

Dan Leonard (Managing Director and Research Analyst)

Got it. And then, Tony, can you clarify what is the order growth assumption in Q3? Sequentially, order growth assumption required to hit that fourth quarter ramp?

Tony Hunt (CEO)

Yeah, there's no, our order assumption is the second half of the year order assumption. The order assumption is 4% order growth in the second half of the year to hit the midpoint of our guidance. It's 5% revenue growth in the second half of the year to hit the midpoint of our guidance.

Dan Leonard (Managing Director and Research Analyst)

Thank you.

Operator (participant)

The next question comes from Paul Knight of KeyBanc. Please go ahead.

Paul Knight (Managing Director and Equity Research Analyst)

Hi, yeah. Could you talk to what portion of revenue, what % of revenue is from, I would say, new modalities? But I think the definition more would be where you really have limited competition, such as OPUS, VPE, ATF, Avitide. What's your kind of percentage range on that, Olivier or Tony?

Tony Hunt (CEO)

Yeah. So, Paul, I would say on new modalities, it's about 20% of our revenue is coming from new modalities. Obviously, we've had a good first half of the year. The growth is coming from the top 25 accounts. I think it's really hard to bundle all the other product lines that we have that we would say are somewhat unique to Repligen. In general, if you take outside our fluid management space, everything else is somewhat unique and independent. So hard to put a number on it. But I would say in the second half of the year, the 11% growth ex-COVID is probably a good proxy for how those businesses are all growing in the second half of the year.

Paul Knight (Managing Director and Equity Research Analyst)

And then the last question on my side would be, under the account management structure that you implemented, Olivier, how much of the growth we're seeing is coming from that? Or I guess a better way to think about it, as we think about 11% growth, how much of that is coming from this effectiveness of the sales change? Is it a half, a quarter? Can you talk to that? Thanks.

Olivier Loeillot (Chief Commercial Officer)

No, actually, so it's still a little bit early data. As we really put in place our organization about a year ago, so we are really off to a very great start. I mean, in fact, the performance both from the sales and order point of view is really great. And so far, we really want to see how 2024 plays out. And then we will be able to give more details probably by 2025. But yes, the traction we're getting from those key account teams is absolutely excellent right now.

Operator (participant)

The next question comes from Matt Hewitt of Craig-Hallum Capital Group. Please go ahead.

Matt Hewitt (Senior Research Analyst)

Good morning, and thank you for taking the questions. Maybe first up on a high-level view, some of your peers have talked about or have noted a lag from the improving funding environment to the orders and purchases. Yet you spoke to a pretty strong book-to-bill, a strong order flow. Are you maybe seeing earlier progress because of the funding? Or is there a chance that you could see an acceleration even in some of the ordering patterns that you've already seen here in Q2?

Jason Garland (CFO)

Yeah, I think the commentary from our peers is consistent with our thoughts and feelings as well. There definitely is a lag from improving biotech funding to orders. There's no doubt about it. So when we look at our Q2, and rightfully you're pointing out that our book-to-bill was higher than what others have seen, I think it's more around the consistency that we've been able to put into how we perform as a company over the last four quarters. So we've been around that 1.0, 1.04, I think is the average. We have a lot of, as Olivier said earlier, we have a lot of unique products in our portfolio. So I think that helps a little bit. We also probably didn't have as much of the destocking to deal with as some of the other players in the industry.

So I think that's also positive for us. But we feel like this is being the turning point in the markets. And we expect as we move into this high single-digit overall growth, low double-digit ex-COVID, that that's a real positive sign as we exit 2024 and move into 2025.

Matt Hewitt (Senior Research Analyst)

Got it. And then maybe separately, you're implementing another 7% cost reduction here in the second half. Is there any risk that the markets come back faster than you're forecasting or anticipating and you kind of get caught a little flat-footed from a headcount perspective? I think this is what the third cost optimization that you've implemented here in the past year or so. And I'm just wondering if there's any risk that if the markets come back quickly, you might not be able to adapt fast enough.

Jason Garland (CFO)

I think we feel like we're well, I'll say, set up to execute. And a lot of the cost savings that will continue to fall through in the second half have been continuing to be in flight and have been to be more on the operating expense side. Certainly, at the factory level, we have that capacity to grow here in the second half and be established to go into 2025. So I don't really see that as a risk for us. We've been managing this very closely and have good line of sight.

Tony Hunt (CEO)

And Matt, I wouldn't think about it as cost reductions as most. It's more like we are now in a mode where we put a lot more focus on productivity and insourcing because of all the deals we've done over the last 9 or 10 years. That gives us opportunities to reduce internal costs.

It's kind of a bigger picture cost reduction, but there's a lot of positive things going on internally in the company that are more productivity-related, insourcing-related, just looking at supplier management. All of those things help towards an improving margin profile for the company.

Operator (participant)

Our next question comes from Matt Stanton of Jefferies. Please go ahead.

Matt Stanton (Senior VP)

Hey, thanks. Maybe one for Tony or Olivier. I want to ask a question I just talked about a little bit earlier. You talked about your ability to drive above market growth here in the back half of the year in 2025. I guess the question is, what is market growth? How do we think about the growth algorithm for the industry going forward? Clearly, mAbs remain a big driver, commercial volumes, new modalities scaling up, biotech funding a little better, but China is tough. There's an ongoing debate on yield improvements, pricing. There's a lot of moving pieces. But if you had to package it up, how do we think about kind of market growth going forward? Should it be at, call it, pre-COVID levels? And I guess it's less about Repligen's ability to outgrow the market and really what is the market growth you're outgrowing? Thanks.

Tony Hunt (CEO)

Yeah, the way I look at it is you can see the progress that everybody in bioprocessing has made, especially in Q2. So as our peers reported out over the last week to 10 days, I think there's a lot more green shoots now than there was 12 months ago. And yeah, we need to—it needs to be determined a little bit what overall market growth is going to be as we go forward. We're not the market leaders, so it's kind of hard for me to tell you that all market growth is going to be X% in 2025. I think what we do know is historically, 8%-12% has been a really good proxy over the course of 5, 10, 15 years to represent what market and bioprocess is.

Whether the overall market growth next year is at the low end of that, medium end of that, that remains to be seen. We'll see when the bigger players report out at the end of the year or actually beginning of next year on what they see as overall market growth. It's definitely going to be better than 2024, and I think we're trending in the right direction for everyone.

Matt Stanton (Senior VP)

Thanks. That's helpful. And Jason, maybe one on margins, your updated guidance kind of mid-teens operating margins in the back half of the year. Any more color you can provide as we think about a jumping-off point for 2025? Understand a lot will depend on where top line lands next year, but in terms of cost outside efficiency, it sounds like a little bit of spending is coming back in on the commercial side. Can you maybe talk a little bit about kind of what's in your control for 2025 and what's tied to top line? And then any finer point you can put on potential incremental margins as the top line comes back and we return to double-digit next year, I think the second half incrementals here are pretty healthy. So any finer point you can put on as we think about incrementals for 2025? Thanks.

Jason Garland (CFO)

Yeah, well, certainly, we're not ready to issue our full guide on 2025. But I go back to Tony's point about we've got a bigger picture effort on how we continue to manage costs and drive efficiency each and every day. And so that will certainly be a tailwind for us as we go into 2025. Also, certainly, as you look at the profile of profitability through as we've gone from first quarter to second quarter and as we roll in third to fourth, that that gives us a good jump-off point as well as we go into the 2025. And again, the framework by which we'll ultimately guide on 2025 will be continuing to drive gross margin improvement and then getting more leverage, if you will, on top line growth outpacing our OpEx. And that's where we'll really see it fall through at the operating margin level.

I think we're positioning ourselves well and more to come as we get into the beginning of the year.

Operator (participant)

Our next question comes from Tom DeBourcy of Nephron Research. Please go ahead.

Tom DeBourcy (Principal)

Hi guys. I'll keep this short because I'm already over. But just if you could remind me on your visibility, just in terms of my recollection has been you typically have pretty strong visibility on a six-month basis in terms of more firm orders. And so there's been some questions around, I guess, weakness in Q3 moving to Q4. And so just can you just comment a little bit more about that specific visibility that you have kind of through the end of this year?

Olivier Loeillot (Chief Commercial Officer)

Yeah. I mean, specifically for COVID, most of the bioprocessing company had about 3-4 months of backlog in hand. And then during COVID, it jumped up to about 10 months for each of the bioprocessing companies. So it changed the picture completely. Well, one of the reasons why all of these book-to-bill have been like they're very much behind one now for the last two years is because we went back to probably a typical 3-4 months of backlog in our hands. So when you think about it, when you have about 3-4 months of backlog, you typically enter in the quarter having about 60%-65% of your quarter secured, meaning you need to collect about 1/3 of your quarter in the quarter.

And then the rest you have in your backlog is typically sitting in the next quarter and then a little bit in the second quarter beyond. But yeah, typically 3-4 months of backlog and 60%-65% of the quarter secured when you enter into the new quarter.

Tom DeBourcy (Principal)

Great. Thank you.

Operator (participant)

The next question comes from Subbu Nambi of Guggenheim Securities. Please go ahead.

Subbu Nambi (Managing Director)

Yeah. Thank you, guys, for taking my question. Actually, an extension to Tom's question on visibility. Where would you say you have the best visibility for second half? Would it be CDMO versus pharma, or would it be customer sizes?

Tony Hunt (CEO)

Could you repeat? That was hard to hear. Are you asking if the second half of the year is going to be more driven by CDMO versus pharma? It was hard to hear. Sorry.

Subbu Nambi (Managing Director)

Exactly. So the support gives you the confidence on the second-half trends. Would you say you have a better handle on CDMOs or pharma biotech or customer size?

Tony Hunt (CEO)

Yeah. I would say that pharma has been a real strength for us through the first half of the year. So I expect that that will continue for the second half of the year. Consumables have been really strong the first half of the year. Again, I expect consumables to stay strong. Same thing on new modalities. I think you're right. Wildcards a little bit, how much we see of the consistency from CDMOs and how much capital equipment comes back. But we would expect capital equipment to be stronger in the second half of the year given that customers tend to purchase in late Q3 going into Q4. So I think for us, the more important piece is for us to get to the midpoint of guidance. We need 4% order growth, 5% revenue growth. I think that's achievable.

Subbu Nambi (Managing Director)

Got it. Super helpful. Thank you, guys.

Operator (participant)

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

Tony Hunt (CEO)

Great. Thanks, guys, for joining us. Last time for me to say this, but we'll see you guys back in November. Obviously, Olivier will be leading the conversation then. I look forward to listening in on the progress that Repligen will be making as we go through the year.

Operator (participant)

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