Repligen Corporation (RGEN) Q2 2016 Earnings Report, Transcript and Summary

Welcome to the Repligen Corporation’s Second Quarter 2016 Earnings Conference Call. My name is Torya and I will be your coordinator. [Operator Instructions]. I would now like to turn the call over to your host for today’s call, Sondra Newman, Senior Director of Investor Relations for Repligen.

Good morning and thank you for joining. Today we will discuss our financial results for the second quarter of 2016, we will update our guidance for the year and discuss recent business highlights. Joining me are Tony Hunt, our President and CEO; and Jon Snodgres, our CFO. During the course of this call we will make forward-looking statements regarding business goals and our expectations for the financial performance of the company. We caution you that such statements are subject to risks and uncertainties that may cause actual events or results to differ. In particular, unanticipated events outside of our control may adversely impact future results. Additional information concerning these risk factors is discussed in our annual report on Form 10-K, the current report on Form 8-K which we filed today, and other filings that we make with the Securities and Exchange Commission. The forward-looking statements in today’s discussion reflect management’s current views and may become obsolete 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’ll be presenting our financial results and providing guidance on an adjusted or non-GAAP basis as well as on a GAAP basis. Adjusted figures will include the following; revenue growth at constant currency, adjusted operating income, EBITDA, adjusted EBITDA, and adjusted net income, and fully diluted earnings per share. A reconciliation of GAAP to non-GAAP financial measures is included as an attachment to our press release issued this morning. While these adjusted financial measures should not be viewed as an alternative to GAAP measures, the company believes that the use of non-GAAP measures better enables investors to benchmark its results against historical performance and the performance of peers and to evaluate investment opportunities. With that I’ll turn the call over to Tony Hunt for a business update.

Thank you, Sondra. Good morning, everyone. Quarter two was another strong quarter for the company both financial and in terms of delivering on many of the strategic goals that we set for ourselves at the beginning of the year. As our bioprocess business expands we continue to be encouraged by this strengths we’re seeing in our end markets and as a results we’re increasing our top line revenue guidance for 2016 to 101 million to 105 million which John will cover in more detail in the financial update portion of this call. Let me first start with execution on the stated strategic goals, we think on the quarter off by acquiring Atoll GmbH to complement our fast growing OPUS line and to provide European customer center. We raised over 100 million in capital in May, we invested in operations to expand capacity and finally we delivered an exceptionally strong quarter here in terms of top to bottom line growth. The Atoll integration has gone well and we achieve for sales target in the quarter keeping us right in-line with our deal model. With this business we wanted to get off to a fast start, I'm pleased to report that our commercial team is fully trained on product line and the account mapping of Atoll accounts to existing OPUS accounts. We’re working through branding and our goal is to have the Atoll portfolio fully integrated into the OPUS family brand by the end of this quarter. Customers have reacted very positively to the acquisition and I expect we will see the benefit of an integrated portfolio of products covering development through product scale columns during the second half of 2016 and into 2017. The capital raised was key milestone for us as it puts us in a much better position to execute on the future internal capacity investments. We continue to be very active on the M&A front, we expect to add market leading technologies into our portfolio as opportunities arise. As mentioned in previous quarters we have experienced a significant uptick in demand for OPUS columns and as you know we made the decision back in quarter one to increase capacity during that time. Our current manufacturing suite came online April and we will have two more suits up and running by the end of the quarter, with pre-packed column demand remaining high this increased capacity will help drive down lead times by the end of the year but is in a strong position for 2017. On the commercial front our sales and marketing teams continue to execute, with strong opportunity funnels for the second half of this year. We have added sales [indiscernible] in Europe in quarter two, and we have also notified our North America and European ATF distributors that we will be going in these regions for ATF beginning in 2017. In Asia we’re committed to using combination of distributors, Repligen sales managers to drive growth and adoption of our bioprocessing portfolio. In China, our distributor is adding an [indiscernible] center and is significantly increasing direct sales technical specialist in 2016. This increased investment by our distributors will enable more frequent calling at key accounts to allow us to further expand within this important region. So moving now to our quarterly results, as reported today we had record sales of our bioprocessing products 29.2 million and an increase of 36% over the last year. We also grew adjusted EPS for the quarter by 26%. Our performance in Q2 is driven by the platform of our technologies and key accounts. Strong execution by our commercial developing existing and expanding into new accounts and finally by the contributed strength in the biologics and bioprocessing markets. For the quarter OPUS was most significant driver for growth. We also saw strong demand for growth factors and ATF while [indiscernible] came on forecast. Our OPUS business continues to accelerate led by the OPUS 45 and 60 centimeter format. Demand for 45 and 60 centimeter columns is significantly throughout the first half of 2016 with large pharma continuing to migrate in pre-packed columns, a trend that emerged in the second half of last year. Unit sales of 45 and 60 columns have more than doubled first half of this year versus the same period in 2015. We now estimate OPUS will grow approximately 100% for 2015. Our growth factor business also had a strong quarter as demand for IGF-1 reagent has increased. The vast variety of one falls into two categories pre-formulated into cell culture media our [indiscernible] supplementation processes. We continue to work closely with key accounts, and sigma [ph] to deliver custom formulations and formats as customers scale up their manufacturing process. Our XCell ATF business had another strong quarter led by system and consumable sales in North America and Asia. As a number of applications for ATF expand specifically in N-1C strain vaccine [ph] and hybrid perfusion applications. We’re seeing more multi-unit orders for our smaller system. In Asia for example, we had one customer purchase 19 systems for process development of scale of applications which is a strong endorsement of the technologies. One of the benefits of increasing the number of installed systems in the field which we have done now consistently over the last two years is the opportunity for follow-on consumables. Our consumable growth this year has been approximately 50% and we expect this to continue as our customer base expands. Customers are also excited about our new products, in particular a single use ATF system. Beta site feedback throughout Q2 has been very encouraging. We have accepted and delivered multiple orders for single ATF6 units which will be officially launched here in September. We have also accelerated the development of single use ATF2 and this product will also launch in Q3. Finally we have upgraded and launched next generation version of the stock for ATF controllers adding features that are being requested by our customer base. So it's an exciting time for ATF as this technology continues to grow and expand. As we look at the second half of the year our pipeline is strong and with the launch of single use ATF we expect the number of new account opportunities to increase. Our Protein A ligands business came in as expected for the quarter. Given the direct tie of our ligands business, the production of monoclonal bodies continued to be encouraged by high approval rates, with six FDA approvals this year. Among these six first U.S. approval of a biosimilar version of the blockbuster [indiscernible]. Keeping in mind that the demand for the products Repligen manufactures is based on volume. We believe this time dynamic is creating additional opportunities for our business. As we move into the second half of the year we're encouraged by the strengthen in our end markets and the overall trends in our industry. Our biopharma customers our investing capital expansion project to increase overall capacity at their facilities as the biologic and biosimilar market grows. Large pharma continues to outsource to CMOS but we’re very entrenched with our technologies and where we deliver a combination of convenience flexibility, speed and the ability to significantly increase yield and productivity. In addition, the movement towards continuous processing from standard batch production is gathering momentum in both upstream and downstream by processing and we are really well positioned with our ATF and OPUS product lines. These factors along with our continued traction and our expanding global presence in both process development and manufacturing facilities puts us in a very good position for the remainder of 2016 and into 2017. We're pleased with the overall performance during Q2 and the growth in the first half of 2016 we look forward to continued execution as we finish the year. I will now turn it over to John for a financial update.

Thank you, Tony. Good morning. Today we are reporting our financial results for the three and six months period ended June 30, 2016. We will also be updating our financial guidance for the year. Our financial results for the second quarter of 2016 were highlighted by strong sales of our bioprocessing products where we’re reporting record revenue of 29.2 million an increase of 36% as reported and 39% at constant currency compared to the second quarter of 2015. Revenue growth was driven by strength from our direct product portfolio. Our gross profit for the second quarter was 16.5 million an increase of 3.7 million or 28% over the second quarter of 2015. Our gross margin was 56.7% for the second quarter of 2016 compared 60% in 2015. The change in year over year gross margin as a result of product mix nominally driven by the higher sales of OPUS and from the impact of operational investments made in our facilities to support the growing demand for our products. Now moving on to our operating expenses. Research and development expenses were 1.9 million for the second quarter of 2016, an increase of 0.6 million or 51% compared to the same period in 2015. Increased R&D expenses are related to ATF development and validation programs covering single use systems and software development on our controllers. SG&A expenses increased to 8.1 million in the second quarter of 2016 from 6.2 million in the second quarter of 2015. The year-on-year increase was driven by a Atoll acquisition cost of 0.7 million, ongoing business cost for Atoll of 0.4 million and 0.8 million in investments as we expanded our commercial organization, operating personnel and systems infrastructure to support the ongoing growth of the company. Also included in our second quarter operating expenses as an additional 0.6 million of contingent consideration expense based on the increased probability of achieving the ATF sales milestones for 2016, the company's final year of this obligation. We are now holding an accrual of 4.7 million on our balance sheet representing over 100% of the 4.25 million potential fixed component payout and 84% of the 5.55 million total potential payout for 2016. In the event that the ATF sales milestone for 2016 is not achieved the company will reverse the 4.7 million accrual. GAAP operating expenses for the second quarter of were 10.7 million compared to 8.3 million in the same period of 2015. Adjusted operating expenses for the second quarter of 2016 was 9.3 million compared to 7.5 million in the same period of 2015. Adjustments of 1.4 million in 2016 include the aforementioned full acquisition and refined contingent consideration expenses. In 2015 quarter adjustments of 0.8 million were made for a fine contingent consideration. Now moving to income and earnings for the quarter, on a GAAP basis operating income was 5.9 million in the second quarter of 2016 representing a 20.1% operating margin compared to 4.6 million in the same period in 2015. Adjusted operating income for the second quarter grew to 7.2 million an increase of 1.8 million or 34% compared to the second quarter of 2015. This increase was driven by margin pull through from our year over year sales growth resulting the adjusted operating margin of 24.8%. Adjustments to operating income include the aforementioned Atoll acquisition and refined contingent consideration expenses. Interest expense for the second quarter of 2016 was 0.6 million attributable to cash and noncash interest of 0.3 million and 0.4 million respectively related to our convertible debt financing that closed in May. Interest expense was de minimus during the second quarter of 2015. Income tax expenses for the second quarter of 2016 totaled 1.5 million or 28% of pretax income compared to a 17% tax rate for the same period in 2015. The higher tax rate in 2016 is a direct result of higher year over year profitability in our Swedish entity while we have a 22% tax rate and a lost position in our U.S. entity. On a GAAP basis net income for the second quarter 2016 was 3.9 million compared to 3.6 million in the same quarter of 2015. Adjusted net income for the second quarter of 2016 was 5.6 million an increase of 1.2 million or 28% compared to the same period in 2015. Adjustments to net income totaled 1.7 million which includes the aforementioned Atoll acquisition and refining contingent consideration expenses and the noncash interest associated with our convertible debt financing. On a GAAP basis second quarter 2016 fully diluted EPS was $0.1 consistent with the 2015 quarter. Adjusted non-GAAP earnings per diluted share for the second quarter of 2016 were $0.16 compared to $0.13 in the second quarter of 2015. Adjustments to diluted EPS include $0.05 from the previously mentioned combined impact of refined contingent consideration, Atoll acquisition and convertible debt non-cash interest expenses in the second quarter of 2016 and $0.02 from contingent consideration expense in the second quarter of 2015. EBITDA for the second quarter of 2016 was 7.3 million compared to 5.5 million for the same period in 2015. Adjusted EBITDA for the second quarter of 2016 was 8.6 million compared to 6.3 million for the same period in 2015, an increase of 38%. In the 2016 quarter, adjustments to EBITDA of 1.4 million include the aforementioned Atoll acquisition and refined contingent consideration expenses. In the 2015 quarter adjustments of 0.8 million were made for contingent consideration. I will now report on our year-to-date 2016 financial results, for the six month period ended June 30 where we have driven strong revenue growth and operational performance. Year-to-date in 2016 we were reporting product revenue of 54.3 million an increase of 28% as reported and 29% constant currency compared to the 42.3 million reported in 2015. This growth reflects a particular strength in our OPUS and ATF product lines. We were reporting year-to-date 2016 gross profit of 30.6 million an increase of 4.9 million or 19% compared to the same period in 2015. Year-to-date gross margin of 56.3% compares to 60.6% in 2015 but the change driven by a combination of product mix and capacity expansion activities aimed at increasing factory capacity. Year-to-date 2016 operating income was 9.3 million compared 8.6 million for the same period in 2015, year-to-date adjusted operating income grew to 13.1 million an increase of 2.6 million or 24% compared to the same period in 2015. This increase was driven by margin pull through from our year over year sales growth resulting in the year to date adjusted operating margin of 24.1%. Adjustments to 2016 operating income include 1.1 million of the total acquisition expense and 2.7 million of contingent consideration expenses and the 1.9 million of contingent consideration recorded in the first half of 2015. Year-to-date 2016 interest expense was your 0.6 million attributable to the previously mentioned cash and noncash interest of the 0.3 million and 0.4 million respectively related to our convertible debt financing. Interest expense was de minimus during the comparable period in 2015. Year-to-date 2016 other expense was 0.9 million due to non-operational foreign currency expense recorded in the first quarter of this year. The other expense was 0.1 million for the comparable period in 2015. Year-to-date net income was 5.5 million compared to 6.5 million for the same period in 2015. Adjusted net income for year-to-date 2016 was 9.6 million an increase of 1.2 million or 14% compared to the same period in 2015. Adjustments to 2016 net income of 4.1 million include Atoll acquisition, refined contingent consideration and non-cash interest expenses. Adjustments to 2015 net income include 1.9 million of refined contingent consideration expense. On a GAAP basis year-to-date 2016 fully diluted EPS was $0.16 versus $0.19 for the same period in 2015. Adjusted earnings per diluted share for year-to-date 2016 were $0.28 an increase of $0.03 from the same period in 2015. For year-to-date 2016 adjustments to EPS totaled $0.12 which includes the impact of the previously mentioned refined contingent consideration, Atoll acquisition and convertible debt non-cash interest . In the 2015 period adjustments to EPS of $0.06 reflect the impact of refined contingent consideration. EBITDA for year-to-date 2016 was 10.9 million compared to 10.8 million for the same period in 2015. Adjusted EBITDA for year-to-date 2016 was 14.6 million compared 12.7 million for the same period in 2015. In both periods adjustments from EBITDA include the aforementioned Atoll acquisition and refine contingent consideration expenses. Our cash, cash equivalents and marketable securities at June 30, 2016 were 181.8 million reflecting a net increase of cash of 108.4 million from year-to-date 2015. Now moving to full year 2016 guidance. Please keep in mind that our 2016 guidance may be impacted by fluctuations and foreign exchange rates beyond the current levels and does not include the potential impact of additional contingent consideration expenses or any reversal of the 4.7 million refined contingent consideration accrual for potential new acquisitions. Today we are raising our total revenue guidance range to 101 million to 105 million an increase from our previous guidance of 98 million to 102 million. Our revenue projection for 2016 reflects growth in the range of 21% to 26%, or 22% to 27% constant currency basis, an increase from our previous guidance of 17% to 22% at constant currency. Based on recent FX rates that we use as a proxy for the remainder of the year we now expect foreign exchange headwind of 1% to 2% on sales for the year. We’re tightening our gross margin guidance to 56% to 57% from our previous guidance of 57% to 59% based on the stronger than expected growth of OPUS and the associated change in mix. GAAP operating expenses are expected to be in the range of 39 million to 41 million an increase from our previous guidance of 37.5 million to 39.5 million, predominantly due to second quarter refine contingent consideration of 0.6 million and higher commissions associated with our increased sales guidance. We're increasing our adjusted operating expenses to 34.5 million to 36.5 million of our previous guidance of 34 million to 36 million. Adjustments include the previously mentioned 2.7 million of refined contingent consideration reported in the first half of the year and 1.5 million of the total acquisition and integration expenses expected in 2016. R&D expenses are expected to be approximately 7 million consistent with previous guidance. GAAP SG&A expenses are expected to be in the range of 29 million to 31 million compared to prior guidance of 28.5 million to 30.5 million. Adjusted SG&A expenses are expected to be in the range of 27.5 million to 29.5 million versus pervious guidance of 27 million to 29 million. Adjustments include the aforementioned 1.5 million of total acquisition and integration expenses expected to be incurred in 2016. Our GAAP operating income guidance for 2016 is 17 million to 19 million compared to our prior guidance of 18 million to 20 million, we’re guiding to full year 26 adjusted operating income of 21 million to 23 million change from our previous guidance of 21.5 million to 23.5 million. Our adjusted operating income guidance includes our additional revenue projections and excludes 4.1 million of expected total acquisition in refined contingent consideration expenses. We’re guiding full interest expense to 3.7 million inclusive of 1.5 million of cash interest and 2.3 million of non-cash interest related to our convertible debt financing. Interest expenses was de minimus in our prior guidance. We’re guiding full year other expenses to 0.9 million due to the non-operational foreign exchange expense already recorded in our year-to-date P&L. We were expecting 2016 income tax expenses of 5 million to 5.55 million consistent with previous guidance. Our GAAP net income is projected to be 8 million to 10 million compared to our previous guidance of 12 million to 14 million. Adjusted net income for 2016 is expected to be 14.5 million to 16.5 million versus our prior guidance of 15.5 million to 17.5 million. Our adjusted net income guidance includes the aforementioned additional revenue projections, cash interest expenses and foreign exchange expenses and excludes the 6.4 million of expected of total acquisition refined contingent consideration and non-cash expenses. We expect GAAP EPS for the year 2016 to be in the range of $0.23 to $0.29 on a fully diluted basis an adjustment from previous guidance of $0.35 to $0.41. Adjusted earnings per share are expected to be in the range of $0.42 to $0.48, a change from our previous guidance of $0.45 to $0.51, adjusted EPS guidance includes the aforementioned revenue projection and the unfavorable impacts of $0.04 from cash interest expense and $0.02 for foreign exchange expense and excludes a negative $0.19 impact from aforementioned total acquisition, refined contingent consideration and non-cash interest expenses. EBITDA is expected to be in the range of 22 to 24 million, consistent with prior guidance, adjusted EBITDA for 2016 is expected to be 26 million to 28 million with depreciation and amortization expenses in the range of 5.5 million to 6 million consistent with previous guidance. The company expects to generate free cash flow in the range of 13 million to 15 million in 2016, including approximately 5 million of capital expenditures to support maintenance and continued factory expansion initiatives. We are expecting year-end cash, cash equivalents and marketable securities of 187 million to 189 million. This completes our financial report and I will now turn the call back to the operator to open the lines for questions.

[Operator Instructions]. Our first question comes from Paul Knight of Janney Montgomery Scott. Your line is now open.

Could you OPUS specifically where are you with the production lines? Are customers now in the past beta, is it multiple orders now of OPUS already in the stage of that product development cycle?

Yes sure. So as you know we added the one extra suite of capacity back in April and we're adding two more this quarter. So by the time we get into early September. We'll have five production suites up and running for OPUS and you’re right we're definitely seeing more multi-unit orders. It's no longer the one column going to a customer, it's really the whole process. So we get maybe three columns as I said in my opening remarks where we're seeing that migration into large pharma. So we are getting larger orders from the some of the bigger pharma players. So you know 45 and 60s are clearly what's driving the growth for us right now. The rest of the portfolio is doing very well as well but obviously the 45s and 60s drive volume.

And then you had mentioned Atoll like -- fully integrated into Q2 -- could you repeat that and then what are the steps you want to take with Atoll in terms of is it a common sales force, what are the synergies you are targeting?

Yes. So I think the first step was to make sure that we've got the Relpligen sales team full trained on Atoll products so we did that very early in Q2. What we've been doing since then is really mapping the accounts Atoll has with the ones that we have today from OPUS and there's a good amount of overlap and so what we've been able to do now is take the Atoll portfolio of products and using the Repligen sales team and drive increased activity. So I think our activity levels are high. I think the opportunities are beginning to come through as we finished off Q2 and as we enter into Q3. So my expectation is that it's one team selling both the Atoll portfolio into process development and the OPUS product line into the clinical manufacturing space. We will get branded, the whole portfolio will be branded under OPUS with the process development products like robo-columns and mini-columns and [indiscernible] all being OPUS branded so I think the integration is going well, the activity is high and I think we're in good shape for the second half of the year.

And then lastly Tony, on the Pure Light and General Electric you’ve announced Ligand the capacity additions when would that their facility build kind of turn into demand for your protein A?

The way I would look at that Paul is more around it's a little bit like what we're doing with OPUS right so we're putting in extra capacity there building up their manufacturing capabilities. I would probably pay more attention to the continued number of approvals of maps and continued number of approvals of biosimilars. Typically people are when they do capacity expansions of the scale. I think that seemed GE and Pure Light are doing are probably looking out two or three years. So I think they are just gearing themselves up you know to be able to meet demands up till 2020.

And your next question comes from Matt Tiampo of Craig-Hallum. Your line is now open.

Just a quick one for me I'm wondering if you're seeing any evolution or change in the number of the percentage of customers that are having you procure the resin for them for OPUS or drop shipping and how do you think that dynamic is going [indiscernible] couple of quarters to couple of years.

If you look at quarter two and you compared with last year the split of OPUS column revenue to resin revenue is about the same so there was really no change. But what I think we're going to see as we get into the second half of the year and as we move into 2017, as the volume of 45 and 65 increase. I fully expect that we're going to see more drop shipment of resin [indiscernible] to Repligen and that’s just the trend that I think will happen as we hit the second half of this year and going to 2017. I think the reason for that is when you do one column it easy for Repligen to go ahead and procure that resin, when someone orders five or 10 columns then I think the pricing that they would get worse what we would get at Repligen will be different so we would expect to see more of a shift towards dropshipping.

Our next question comes from Drew Jones of Stephens Inc. Your line is now open.

In the prepared comments you guys mentioned capacity investment a couple of times. Am I my reading it correctly that's above and beyond what you're doing for OPUS and spreading into other product lines and then can you give us an update on where are we in terms of capacity utilization for you know Protein A [indiscernible] maybe ATF to a lesser extent.

Sure. So the majority of the capacity expansion plans Drew are really related to OPUS. There are some things we're doing around ATF but most of the you know the capacity expansion around ATF was done last year. And you know the single use products for ATF are really just getting going now. So I think we're in good shape there. You know there will be some capacity but it's more people that we look at all around our ligands business and that's something that we've been adding as we've gone through this year and we'll assess that you know when we're in you know Q3, Q4 and see what we need to add for next year as we begin to see some of the forecast from our partners. In terms of capacity utilization we continue to -- when I look at obviously OPU and ATF we're in good shape on capacity, our increasing capacity of OPUS is really related to driving down lead times and we think that's something that we're going to continue to focus on here in the second half of the year and into 2017, but overall I think capacity utilization is very similar to where we were last year where we've got still plenty of capacity on our ligands and anything we do there will be related to man power.

Okay and then on OPUS last couple of quarters you guys gave pretty good updates in terms of large pharma partnerships. You mentioned in a couple of times already today is there anything incremental beyond what you've said the past couple of quarters in terms of I think last quarter you said you had one large pharma customer that is committed to what OPUS at a disposable column, any updates like that that you could provide?

Yes sure there are more large pharma that have come in Q2 that are committing some of the other players that we've always wanted to get into have started to evaluate some of the larger columns that we make, but it's not to a point where they've said they've fully committed to moving to replacing say glass columns with pre-packed columns but we made a lot of progress there but there's also some of the CMOS through that again you know we're not in every CMO we weren’t in every CMO at the beginning of the year but some of the big CMOs that we've wanted to get into globally. We've been able to make some progress there as well. So it's really across the board. The CMO traction is very strong, we're seeing the increase in the number of pharma customers that are migrating to pre-packed columns from glass columns so it's just a very positive trend for us.

And then last one for me, driving down those lead times with OPUS. Can you tell us what's the backlog here? Maybe gives the peak there what's what the backlog and when do you kind of feel that accelerating, is it 4Q?

Yes, I would say that we’re fully booked through Q3 on OPUS. We've really done a very nice job with our customer base in terms of seeing people up in terms of when they need columns and making sure they get it on time. So we've really you know pretty much fully booked through Q3. Obviously with two more production suites coming online really at the beginning of September we would expect that we'll be able to drive down the lead times as we enter Q4. So if you're spot on in your analysis there.

And our next question comes from [indiscernible] of Jefferies. Your line is now open.

Tony, two part question for you, the strength that you pointed to in with growth factors is that tied to drugs going into commercial production by chance and then secondly you sort of spoke to the platforming of the portfolio. Is there any metrics or numbers or your data points you can sort of speak to that would I guess add some context to your success in selling the entire direct portfolio?

Sure. So on the growth factor side the majority of the volume does come from commercial drugs that we've been in that for a number of years. We've known really for the last year or so that a number of those companies are making second-gen, nex-gen molecules transferring production to new facilities so with that comes some increased volume. So that's really the major driver obviously, we continue to focus on building out the pipeline, but it's a long and fairly slow process but overall I think our growth factor business is really driven by the commercial drugs and those that are in late stage. On your question on platforming, clearly the strategy that we've put in place over the last couple of years which is to really drive to direct portfolio of products that we have here at Repligen into the marketplace and really leverage the commercial organization that we've also put in place over the last 2.5 years. That's having an impact and you know when you look at the success of ATF and you look at success of our pre-packed column line we see it all this year and revenue growth that we’re achieving and I think what's important is that technologies like ATF are becoming platforms. So they're being used in you know multiple processes whether it's you know Phase 1, Phase 2, or commercial processes at key accounts, so we have a really strong portfolio or strong list of accounts and blue chip pharma accounts that have really adopted ATF over the last few years. And so we're in a combination of commercial processes and late stage processes. What's also encouraging is you know as we've looked to China and to Asia in general it's been a real strong area for us and you know when you see companies purchasing '19 smaller ATF systems that's a strong leading indicator that they're going to start scaling over the next few years. So platforming for me is you know being in entrenched in accounts and also having the smaller systems whether it's smaller columns and OPUS or smaller systems on ATF being used in the process development labs and they are already clinical which should become opportunities for us over the next few years as those customers scale.

And then question for you John, on the gross margin is that specifically in the second quarter. Can you give us the some details on the balance of the factors between mix currency and extra capacity and then any directional color you can give us on sort of the staging between the third quarter and fourth quarter understanding that fourth quarter is usually the low watermark for the year.

Sure. So looking at the second quarter gross margins we are -- a good estimate is about 50% of the year over year reduction from say 60% down to 56% is related to our capacity expansion initiatives and about 50% is also associated with the mix predominantly you know the much higher volume of OPUS that we're seeing. As you look forward into Q3 and Q4 in terms of staging and assume you're talking continue with the growth -- the question on gross margin. You know we expect to see similar type of mix and if you look at our year end overall full year guidance of 56% to 57% you can see that year-to-date we’re right in that range and we expect to continue with that range as we go forward. And then in terms of foreign exchange relatively small effect for the year, 1% to 2% on the top line and that’s -- not a huge effect on the gross margins at this point.

And then one for you, could you give us the Atoll revenue contribution in the second quarter and what you’re factoring for the full year and then on the EPS line so just want make sure I understand this right, to take in the midpoint down by $0.03 but $0.06 of that seems to be related to interest expense and then FX so on. Net-net effectively $0.03 better excluding those two items is that correct?

Sure. So I will start with the Atoll situation, in the last quarter we guided 3 million to 3.5 million for Atoll and we’re -- business has taken off well since we purchased it and we’re still guiding in that 3 million to 3.5 million range and there are no surprises whatsoever in the second quarter so business according to plan. in terms of EPS guidance the $0.03 versus $0.06, good question. $0.02 related to foreign exchange was already included in last quarter's guidance, Brandon. So the spread is spread is a little bit later we've made up a little bit on the volume side, volume gross margin side is made up a little bit of the of the $0.04 for the cash interest.

And we have a follow-up question from the line of Drew Jones of Stephens Inc. Your line is now open.

You guys obviously have a lot of dry powder on hand, can you give us an update on M&A activity? How close do you have something to the finish line? Is there anything that’s close to the finish line?

Yes so on the M&A Drew obviously we got the Atoll business back at the beginning of quarter two and as I said you know we're active out there but I think anyone who knows the bioprocessing business, our arena, knows that it's fairly competitive and you know we're going to continue to pursue assets that we think are strategic to Repligen and we obviously will give an update on that if we get closer on something but for now I think we're in a good position in terms of our cash to be able to go out and execute on deals as they come up.

Thank you. And at this time I'm showing there are no further participants in the queue. I would like to turn the call back to management for any closing remarks.

No that’s it. Thanks everybody for joining us this morning.