Repligen - Earnings Call - Q4 2020

Transcript

Operator (participant)

Good day, ladies and gentlemen, and welcome to Repligen Corporation's fourth quarter and 2020 earnings conference call. My name is Sarah, and I will be your coordinator. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by a zero. This event is being recorded. Please note that there will be a question-and-answer session following the company's formal remarks. In order to accommodate all individuals who wish to ask questions, there will be a limit of two questions at a time. I would now like to turn the call over to your host for today's call, Sondra Newman, Head of Investor Relations for Repligen.

Sondra Newman (Head of Investor Relations)

Thank you, Sarah. Good morning, everyone. We appreciate you joining our call. This morning, we'll cover financial results and business highlights for the three-month and full-year periods ended December 31st, 2020. We'll also provide financial guidance for the current year, 2021. President and CEO Tony Hunt will cover business updates, and our CFO, Jon Snodgress, will cover our financial results and guidance. 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 annual report on Form 10-K, our quarterly reports on Form 10-Q, the current report on Form 8-K, which we filed 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're providing non-GAAP results and guidance. Reconciliations of GAAP to non-GAAP financial measures are included in the press release that we issued this morning, which is posted to Repligen's website and also on sec.gov. Non-GAAP figures in today's report include the following: revenue growth at constant currency, gross profit and gross margin, operating expenses including R&D and SG&A, operating income and operating margin, income tax expense, net income, and earnings per share, as well as EBITDA and adjusted EBITDA.

These adjusted financial measures should not be viewed as an alternative to GAAP measures but are intended to better enable investors to benchmark Repligen's current results against historical performance and the performance of peers when evaluating investment opportunities. That's it for me. Now I'll turn the call to Tony Hunt.

Tony Hunt (President and CEO)

Great. Thank you, Sondra. And good morning, everyone, and welcome to our 2020 year-end update. We're really delighted with the way we finished off the year with 47% organic growth in the fourth quarter, 25% organic growth for the full year, and overall 2020 growth for the company coming in at 36%. As we all know, 2020 was a remarkable but challenging year where we observed accelerated demand for our products to support COVID-19 vaccine and therapeutic development. This came on top of very strong growth in non-COVID-related revenue, which grew 18% overall for the year. We were also able to complete a series of strategic acquisitions to advance our system strategy. In addition, we launched innovative new products that will continue to gain traction across our industry, including gene therapy advancemennts.

I'm especially proud of how our team has risen to the challenges of 2020, showing a real drive to make a difference during the pandemic, making tremendous efforts to manufacture and deliver bioprocessing equipment and consumable products to our customers, and to scale our operations to keep pace with accelerating demand. Throughout the year, COVID-related orders increased, and by Q4, COVID programs accounted for 22% of our overall revenue, which is up sequentially from 15% in Q3. For the full year, COVID customers accounted for 13% of our revenue and 17 points of our 36% reported growth. Our order book also accelerated in the fourth quarter and finished the year up approximately 80%, with COVID programs contributing approximately half of this growth.

Based on this order trend, we now expect COVID-related revenues to double from $46 million in 2020 to a range of $90 to $100 million this year and increase from our previous projections of $50 to $70 million. Before jumping into our business highlights for Q4 in 2020, I want to spend a few minutes on the five strategic initiatives that we highlighted at the beginning of last year. Number one was around successful integration of C Technologies and expansion of their customer and application base. The second was around launching disruptive technologies from our R&D pipeline and expanding these technologies into new applications. The third one was around growing our gene therapy business by establishing our core technologies in viral vector manufacturing. Fourth was around expanding our manufacturing capacity to support our business unit growth and our longer-term vision of attaining $1 billion in revenue by 2025.

And finally, number five was around adding new technologies through M&A with primary focus on building out our systems and fluid management portfolio. So let's start with C Technologies in our process analytics business. When we kicked off 2020, we set three goals for ourselves. We wanted to quickly onboard a team of 10 new salespeople to broaden our market presence across the regions, including going direct in Europe. We wanted to build a pipeline of new accounts and expand applications beyond mAbs into gene therapy. And finally, we wanted to focus on FlowVPE. We wanted to demonstrate to customers the power of inline real-time process monitoring and bring the next-gen flow technology to market. It's been an amazing year for our process analytics team. We hired and completed the onboarding of the commercial team in Q1.

We focused on building the funnel with new accounts, which resulted in 50% of the systems sold in the second half of the year coming from these accounts. We expanded the applications for our process analytics products into gene therapy with laser focus on viral vector analysis. Finally, the FlowVPE team moved more than 20 customers into clinical evaluations. At the same time, our R&D team delivered on advancing next-gen FlowVPE technology, and we are now accepting orders for this instrument here in Q1. The business finished the year with pro forma growth of 30% and is on track for another strong year of growth in 2021 in the range of 20%-25%. On the R&D front, our innovation engine continued to produce. We set a goal at the beginning of the year to launch five products and expand our technology adoption, especially in gene therapy.

In filtration, we launched our TangenX SIUS flat sheet cassettes into gene therapy. We ramped our marketing efforts for bench and process scale TFDF systems to significantly improve and simplify harvest clarification. And we completed R&D work on our next-gen ATF controllers. In proteins, we developed a ligand and resin for spike protein in under 10 months, working with Navigo Proteins GmbH and Purolite. Finally, as mentioned earlier, in process analytics, we launched our next-gen FlowVPE technology in the first quarter of this year, which will be used for highly accurate inline protein concentration measurement. In gene therapy, the challenge in 2020 was really around gaining customer access and conducting evaluations during COVID.

Our commercial and field applications teams were incredibly resourceful, and by the end of the year, we had firmly established Opus pre-packed columns, TFDF, flat sheet cassettes, ATF, and VPE technology in viral vector manufacturing applications. Our products match up well with the needs of this customer base, which has resulted in robust demand. We added, on average, 10 to 15 new gene therapy customers per quarter in 2020, and we now have approximately 75 significant accounts adopting and implementing our technology. Even with some gene therapy customers shifting focus to COVID programs, which we exclude from our gene therapy revenues, we achieved approximately 30% growth from our $41 million base in 2019. In 2019 and 2020, we talked about the importance of capacity expansion, and the work done over the last two years really helped us as we were in the middle of a surge in demand.

Having spent just over $26 million in 2020, we accelerated our capital investments. We will accelerate our capital investments in 2021 and expect to deploy $55 to $60 million as we build out our capacity with a major focus on our filtration and single-use products. By mid-2021, we expect to have our European center for pre-packed columns up and running and to have significant capacity in our hollow fiber business. Finally, we plan to complete and build out an incremental 64,000 sq ft of manufacturing space in Marlborough to support our TFF systems, ATF, and flat sheet cassette businesses. On the M&A front, we recognized back at the beginning of the year that our systems portfolio was gaining traction in the marketplace, especially for hollow fiber applications.

We also realized that we were missing opportunities, especially in downstream apps where we did not have the breadth in our systems offerings to address customer needs. The acquisitions of Artisan, EMT, and NMS directly addressed these gaps with gold-standard systems and consumables that truly extend our system offering to chromatography and downstream filtration. We now have a complete portfolio of systems and fluid management consumables, and our goal now is to invest in and expand our customer base as we roll these products out to our global commercial org. As we move into 2021, we will continue to be opportunistic on M&A, and we will focus on expanding our franchise footprint with differentiated technologies. So moving now to the fourth quarter and our business performance. As reported today, we had a record quarter with $108 million plus in sales.

Each of our proteins, analytics, filtration, and chromatography franchises performed well and together delivered almost 47% organic growth in the quarter, with our filtration business leading the way with approximately 60% organic growth. Our chromatography business was up over 20% for the quarter and finished the year up 14%. Within chromatography, our Opus revenues for the full year 2020 were up approximately 20%, and column sales increased by 30%. With the investments we've made in 2019, our capacity increased significantly, and we now have best-in-class lead times for prepack columns in the industry. We continue to migrate customers to dropship resins, which has improved our overall margins, and we are very excited to bring additional capacity online in Europe in mid-2021. We believe this will position us well for the next three to five years, not only on the capacity front but with respect to market opportunities.

Finally, we're excited about the work we're doing with Navigo on the ligand development side, as this has resulted in new opportunities for us to deliver resins in our pre-packed column format, adding to the growth potential for our chromatography business. We expect chromatography will grow in the range of 30%-40% in 2021. Our proteins franchise had a very strong quarter in Q4 and finished the year up 24%. This is the second year in a row where we've had 20% growth for this business. We started the year expecting the franchise to be down 15% given the transition to in-house manufacturing of Protein A ligands at Cytiva.

With the onset of COVID, demand increased, and we saw across-the-board strength from our three main Proteins customers, including increased demand from Cytiva, MilliporeSigma, and continued market traction for our NGL Impact A ligand through the sales of Purolite's Praesto Jetted A50 resin. We expect 2021 to be another strong year for this franchise with growth in the range of 10%-20%. Our filtration franchise was the big growth driver for Repligen in 2020, up greater than 60% in the quarter and up 46% for the year. We benefited from continued traction at gene therapy accounts in COVID, where 60% of our total COVID revenues for the year came from our filtration portfolio.

We are a key technology provider in many of the late-stage and commercial vaccines and expect 2021 to be an exceptional year for filtration given the strong order load and the overall global demand for our products. We expect the filtration franchise will grow in the range of 55%-60% this year. Overall, we expect the company to grow at 37%-43% in 2021, with organic growth in the range of 26%-33%. We expect the first half to be very strong as many of our customers ramp up COVID manufacturing. As we move through the year, our strategic priorities will center on the following. Number one, we want to support ongoing demand for our customers while continuing to prioritize the health and safety of our employees. Number two, we want to build out capacity to support accelerating growth in our business.

Three, we want to integrate Artisan, EMT, and NMS. Four is around new product launches, including our spike protein resin, next-generation FlowVPE, and next-gen TFF systems. And finally, we want to focus on continued traction in gene therapy. We believe we are well-positioned to gain further market share in bioprocessing, relying on our strategy of growth through acquisition, continuous innovation, and expansion of our customer base. We believe that the M&As and highly differentiated new products developed and launched over the last 18 months will propel Repligen to above-industry-average organic growth over the next three to five years, and we have set our sights on achieving $1 billion in revenue by 2025. Before concluding, I wish to recognize our 1,100+ employees around the globe, including our new colleagues at Artisan, EMT, and NMS, for their commitment and leadership in 2020.

I also want to thank our loyal shareholders and customers for their part in Repligen's success as we look forward to delivering another strong year here in 2021. Now, I'd like to turn the call over to Jon for a report on the financial performance.

Jon Snodgress (CFO)

Thank you, Tony, and good morning, everyone. Today, we are reporting our financial results for the fourth quarter and full year 2020, as well as providing our financial guidance for the year 2021. Unless otherwise mentioned, all financial measures discussed reflect adjusted non-GAAP measures. As you've seen in our press release this morning, we delivered record revenue and strong earnings growth for both the fourth quarter and full year 2020, supported by strong overall biologics markets and the significant influence we are seeing from COVID vaccine and therapeutic programs.

We've also continued to execute on our vision of driving technology leadership in bioprocessing during 2020 through new product launches that drive efficiencies for our customers, through the completion of three acquisitions that support our system strategy, and through new applications for our products as we expand their use into a broader set of drug modalities. We also continued to deliver on our plans to expand our manufacturing footprint and capacity and to build out our IT systems to drive down lead times to enable delivery of increased volumes of our critical consumables, equipment, and systems to help our customers support growth we are seeing in the biologic drug development and manufacturing around the world. Now, moving to our fourth quarter and full year 2020 revenue commentary.

On our top line, we realized record revenue of $108.6 million in the fourth quarter of 2020, representing 56% reported and 47% organic growth. Within these figures, reported growth includes a 3% tailwind from foreign exchange and a 6-point tailwind from our 2020 acquisitions. For full year 2020, we reported revenue of $366.3 million, with 36% reported growth and 29% organic growth. The reported revenue results include a 1% foreign exchange tailwind and a 6% contribution from acquisitions. The incremental revenue from acquisitions is comprised of partial year revenue from each of our 2020 acquisitions: Artisan, EMT, and NMS, plus C Technologies revenue for the first five months of 2020. In the fourth quarter, we achieved a consensus beat of $14.7 million, or 13.5% on revenue, with approximately 75% of the beat driven by COVID-related projects and approximately 25% related to the strength of our base business.

Overall, COVID programs represented 22% and 13%, respectively, of fourth quarter and full year 2020 revenues. These same COVID programs represented 17 points of our reported 36% growth for the year. As Tony highlighted, we continued to see strong full-year orders growth across each of our four product franchises, with overall order growth at approximately 80% in 2020, with about 40 points, or half of this growth, coming from COVID-related projects. On a regional basis, for the fourth quarter, Asia continues to be the lead with direct revenue growth of greater than 100%, led by the strength of filtration and chromatography product lines in China. Europe and North America also delivered strong performances with direct revenue growth of approximately 70% and 40%, respectively. On a full-year basis, Asia was again our top performer with direct revenue growth of approximately 60%.

On the same full-year basis, Europe and North America achieved direct revenue growth of greater than 50% and 25%, respectively. For full year 2020, North America represented 52% of the company's direct product revenue, with Europe and Asia accounting for 30% and 18%, respectively. Now, moving down our income statement. Fourth quarter 2020 adjusted gross profit increased to $61.1 million, a ramp of $21.4 million, or 54%, compared to the same 2019 period. Adjusted gross margin for the fourth quarter was 56.3% versus 57.2% reported in the fourth quarter of 2019. Our fourth quarter performance included the impact of planned depreciation from equipment and systems coming online, as well as increased human resource expenses as we continue to focus on capacity expansion to support current and long-term growth. Full year 2020 adjusted gross profit was $211 million, an increase of $57 million, or 37%, compared to the full year 2019.

Full year adjusted gross margin was 57.6%, reflecting a 60 basis point expansion versus full year 2019. Next, we'll shift to adjusted operating expenses. Adjusted research and development expenses increased to $6.7 million in the fourth quarter of 2020, compared to $4.9 million for the 2019 period. Adjusted R&D expenses finished the full year period at $19.7 million, or 5.4% of revenue, compared to $18.8 million spent in the full year 2019, with 2020 spend levels coming in lower than originally planned as we had limited R&D staff on-site in Q2 and Q3. Adjusted SG&A expenses for the fourth quarter were $27.2 million, compared to $22.2 million for the 2019 period. Adjusted SG&A for the year was $93.4 million, compared to $71.8 million for full year 2019, an increase of $21.6 million.

The full year spend increase reflects the timing impacts of our 2019 and 2020 acquisitions, investments in personnel to support capacity expansion, and commercial activities, and systems and occupancy costs, all in support of realized and expected growth. Now, moving to adjusted earnings and EPS. Adjusted operating income for the fourth quarter was $27.3 million, an increase of $14.6 million, or 115%, compared to $12.7 million reported in the fourth quarter of 2019. Fourth quarter adjusted operating margin was 25.1%, an expansion of 680 basis points, compared to 18.3% in the fourth quarter of 2019. Adjusted operating income for the full year 2020 period was $98.1 million, an increase of $34.5 million, or 54%, compared to the same 2019 period. Adjusted operating margin for the full year period was 26.8%, representing a 330 basis point improvement over the 23.5% reported in the same period for 2019.

Full year adjusted operating margin improvements versus the prior year were driven by strong volume growth, favorable product mix, operating expense leverage, and strong overall operational execution by the business. Fourth quarter adjusted net income was $28.7 million, representing an increase of $17.8 million compared to the fourth quarter of 2019. Full year adjusted net income was $89.1 million, compared to $52.5 million for the 2019 period, representing an increase of $36.6 million, or 70%. In addition to our strong revenue growth and operational performance, adjusted net income also benefited from a low adjusted income tax rate of 8.6% for the year, related to the combined impact of incentive stock transactions and one-time benefits from U.S. tax reform changes related to our U.S.-owned foreign operations.

Adjusted EPS increased to $0.52 per fully diluted share in the fourth quarter of 2020, compared to $0.20 in the fourth quarter of 2019, an increase of $0.32. For full year 2020, adjusted EPS was $1.65 per fully diluted share, an increase of 55%, compared to $1.07 for the 2019 full year. Our cash and cash equivalents, which are GAAP metrics, totaled $717 million at December 31st, 2020, an increase of $189 million compared to year-end 2019. Our year-end cash position includes the effects of closing our three second-half 2020 acquisitions and an increase of nearly $298 million from our follow-on equity raised closed on December 10th, 2020.

For full year 2020, we generated free cash flow of $36.3 million, inclusive of $62.6 million of operating cash flow, less $26.3 million of capital expenditures, most significantly related to our facility and capacity expansion projects and IT systems investments. Now, we'll transition to our 2021 full year guidance. Our GAAP to non-GAAP reconciliations for our 2021 financial guidance are included in the reconciliation tables in today's earnings press release. As previously mentioned, unless otherwise noted, all 2021 guidance, excuse me, discussed will be non-GAAP. Please also keep in mind that our 2021 guidance may be impacted by fluctuations in foreign exchange rates beyond our current projection of a nominal impact on full year sales and does not include the potential impact of any future acquisitions that the company may pursue.

In recognition of the continued strength of the overall bioprocessing market, including estimates of revenues from COVID vaccines and therapeutics that are in development and commercialization, we are setting our 2021 full year revenue guidance, a GAAP metric at $500 million-$525 million, reflecting growth in the range of 37%-43% as reported and 26%-33% on an organic basis. Our adjusted gross margin guidance for 2021 is 57%-58%. We expect adjusted operating income to be in the range of $134 million-$140 million, with adjusted operating margins in the range of 26%-27% of revenue for the year. Adjusted other income and expense is expected to be $1 million of expense relating to cash interest expense from our convertible notes. We are expecting our 2021 adjusted income tax expense to be approximately 20% of adjusted pre-tax income.

We are expecting full-year 2021 adjusted net income to be in the range of $106 to $111 million and adjusted EPS to be in the range of $1.86 to $1.94 per fully diluted share. Our adjusted EPS guidance reflects an estimated 57.1 million fully diluted shares outstanding for the full year, an increase of approximately 3.2 million shares. Adjusted EBITDA is expected to be in the range of $153 to $159 million for 2021, with depreciation and intangible amortization expenses expected to be approximately $19.3 million and $24 million, respectively. The company expects to invest $55 to $60 million into capital expenditures in 2021, inclusive of key capacity expansion initiatives for our filtration, chromatography, and proteins portfolios, as well as continued SAP system implementation investments.

We expect year-end cash and cash equivalents, a GAAP metric, to be in the range of $740 million-$760 million, with our CapEx investments being fully funded by cash generation from our operations. This completes our financial report and our guidance update, and I will now turn the call back to the operator to open the lines for questions.

Operator (participant)

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. Please limit yourself to two questions. At this time, we will pause momentarily to assemble our roster. Our first question comes from Dan Arias with Stifel. Please go ahead.

Dan Arias (Managing Director)

Hey, good morning, guys. Thanks for the questions. Tony wanted to start with a guide for the year. If I back out $95 million or so from COVID-related revenues from the outlook, it kind of looks like you're more or less guiding to non-COVID growth that's on par with what you saw in 2020, maybe a point higher, but same ballpark. That seems like a pretty reasonable way to start things off. So can you just maybe talk to the puts and the takes that go into that view versus what you saw last year? Are there market or product areas where you think you see something a little bit different than in 2020? Where's the idea that you kind of probably see a continuation of the trends and the things that drove the non-COVID growth last year?

Tony Hunt (President and CEO)

Yeah. So I think really it's almost like Dan looking at it over the last couple of years. I think we've traditionally been in that 10%-15% organic growth range. This is even before COVID. But we're clearly getting increased traction for our products in the marketplace. We've done a nice job on the gene therapy side. And I think we're moving into that kind of the 15%-20% organic growth for the company and for the foreseeable future, just based on what we see right now. And then you layer on COVID on top of that and clearly, I think having the right portfolio of products and the right relationships with many of the COVID vaccine developers put us in a good position in 2020, and that's kind of carried over here into 2021. So I think you're right.

We're right in that 15%-20% sweet spot. I do think that there is a bit of a trade-off that goes on that I'm sure every other bioprocessing company will tell you is that there is a huge demand for capacity at the CDMO level. So CDMOs that are doing COVID-related work, there's always going to be a trade-off, right? So other projects and programs will get delayed slightly. So for us right now, we think we're in that 15%-20% organic growth for non-COVID and then the COVID revenue in that $90 million-$100 million range. And obviously, that's an incremental $55 million versus last year.

Dan Arias (Managing Director)

Yep. Okay. And then just maybe on new products, because you do have a bunch of those that are in the mix here, do you have a view on the contributions to organic growth that the stuff that's been internally developed over the last, call it nine to 12 months, TFDF, ATF controller, FlowVPE? What are you kind of penciling in for this year, if you have a number? And then specifically for TFDF, how is the launch of that product going now that we're a couple of quarters in? How are you feeling about taking share within the depth filtration market? And then if I could just also ask, what is the outlook there for cell and gene therapy? I remember that Oxford Biomedica paper last year kind of making it seem like that could prime the pump for that product in that area. Next bunch.

Tony Hunt (President and CEO)

Yeah. So I'll start with TFDF. Obviously, this will be the second full year that we've put TFDF in the market. We started off with the CHO strategy. That continues to be probably the primary driver of growth right now. So we've got many evaluations that have gone on, very successful. Like all products, though, and I think we said this a year ago, we expect it's a business that we expect will double every year for the next few years. And we had set a target of $2 million for TFDF last year. We beat that. We're in that $2 to $3 million in revenue. We expect it'll double this year.

Adding in the gene therapy piece and the Oxford paper that you referenced, yeah, has resulted in additional evaluations going on, and we expect that that's going to be another catalyst and another application area for TFDF technology. So I think all of that is very positive. I think if you start to look at it purely from a, what are we factoring into our organic growth this year coming from new products? It's a couple of percent, Dan. It's not much more than that.

Sondra Newman (Head of Investor Relations)

Hello? Our next question comes from Tycho Peterson with J.P. Morgan. Please go ahead.

Julia Liu (Investment Banking Analyst)

Hi. Good morning. This is Julia on for Tycho. Thanks for taking a question. So starting with the vaccine tailwind that you guided to, obviously, it's been upped from the previous range of 50-70. I'm just wondering if you could elaborate on what kind of factors are driving the change. Is it just scale-up with your existing customers? Is it perhaps a new COVID variant speeding up development of next-generation vaccines, or is it incremental contribution from the new ligand or the next-gen FlowVPE that you called out earlier?

Tony Hunt (President and CEO)

Yeah. It's essentially just increased demand for those vaccines and therapeutics that we're involved in. And as we went through, as Jon pointed out, when you look at our Q4 performance, the 75% of the beat came from COVID. That came from increased demand from the vaccine developers, from the therapeutic companies that we're working with. And that's what's really driving the increase again here in 2021. We have more visibility, Julia, now to what's required in 2021 versus three months ago or six months ago. And we'll see as we go through the year how that plays out. But I can say there's very little that is around next-generation vaccines or therapeutics. It's really the processes and opportunities that we're in today.

Julia Liu (Investment Banking Analyst)

Got it. And then regarding your product-level guidance for 2021, I'm just curious because obviously the filtration guidance is significantly stronger than for the other product segments. So just wondering what really is allowing filtration to benefit that much more significantly from COVID vaccine therapeutics. And then separately for the protein outlook, obviously very strong outlook for 2021. But I also remember that the prior expectation for the Cytiva contract was by the end of this year. So has that been extended out, or how should we think about the insourcing expectation?

Tony Hunt (President and CEO)

Sure. On the filtration front, if you maybe think through some of the comments we made already this morning, 60% of our COVID revenue in 2020 came from filtration. So if you also look at what we have in our filtration portfolio.