Good day, ladies and gentlemen, and welcome to Repligen Corporation Third Quarter 2017 Earnings Conference Call. My name is John and I will be your coordinator. [Operator Instructions]. And now I now like to turn the call over to your host for today's call, Sondra Newman, Senior Director of Investor Relations for Repligen.

Thank you, and good morning. On today's call, we are reporting our financial results for the third quarter of 2017 and reviewing our financial guidance for the year 2017. Our President and CEO, Tony Hunt will discuss recent business highlights and our CFO, John Snodgrass, will provide financial report. During this call, we'll be making forward-looking statements regarding our business goals and our expectations for the financial performance of the company. As a reminder, such statements are subject to risks and uncertainties that may cause actual events or results to differ. Additional information concerning risk factors as 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 SEC. Today's comments reflect management's current views, which could 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, unless otherwise indicated, the financial results and guidance that we are providing will be presented on an adjusted or non-GAAP basis only. Reconciliations of GAAP to adjusted financial measures are included in the press release that we issued this morning, which is posted to Repligen's website as well as on sec.gov. Adjusted figures will include the following, revenue growth at constant currency, gross profit and gross margin, SG&A expense, operating income and operating margin, net income, earnings per share, EBITDA and adjusted EBITDA. While these adjusted financial measures should not be viewed as an alternative to GAAP measures, the company believes that the use of these non-GAAP measures better enables investors to benchmark Repligen's current results against historical performance and the performance of peers and to evaluate investment opportunity. With that, I'll turn the call over to Tony Hunt for business update.

Thank you, Sondra, and good morning, everyone. As we finish out the final quarter here in 2017, the last 9 months have been really an exciting time for us as we position the company for the next phase of growth. We started the third quarter by closing out our largest transaction to date, the acquisition of Spectrum. As you know, this deal significantly grows our filtration products business by adding hollow fiber TFF technology, consistent to our rapidly accelerating filtration product line. Since, first, to solidify our market position in filtration, specifically in upstream perfusion, we launched our single-use ATF 10 device, branching out the ATF product line with a large-scale single-use offering. Finally, and most importantly, the Repligen team delivered an excellent quarter with 48% total growth and greater than 20% organic growth in our filtration and chromatography businesses. Our continued success lies in our ability to build a great direct-to-customer business which, after the Spectrum acquisition, represents approximately 2/3 of our business moving forward. This has been my goal since I joined Repligen back in May 2014. We have diversified beyond our core OEM businesses in ligands and growth factors where we are a leading supplier, and moved up in the bioprocessing industry, where we are now a top player in filtration and chromatography with some of the industry's most innovative product including single-use products to address flexible manufacturing. So moving to the performance of Spectrum in the quarter. It was a great first quarter for the team with over 25% growth in sales observed in Q3. This covers both full quarter and 2 months of ownership at Repligen and compares to 7% growth observed in the first half of 2017. The strong performance of Spectrum in Q3 can be attributed to management's refocusing their effort back to…

Thank you, Tony. And good morning, everyone. Today, we are reporting our financial results for the third quarter of 2017 as well as updating our financial guidance for the year. As a reminder, unless otherwise mentioned, all 2017 financial measures discussed will be adjusted non-GAAP. Now moving to our financial results. We report in third quarter of 2017 GAAP revenue of $36.6 million, an increase of approximately 48% as reported and 47% at constant currency compared to the third quarter of 2016. We experienced a 1.5% tailwind in sales due to foreign currency fluctuation, most significantly in our Proteins business, driven by strength in the Swedish krona versus the U.S. dollar. As Tony mentioned, our strong third quarter of 2017 revenue performance was driven by growth in our chromatography business, where we continue to expand our customer base in our large-scale OPUS and OPUS process development product lines and in our filtration business, where we are gaining traction with our single-use ATF and TangenX products, along with a strong performance from our newly acquired Spectrum business. Our adjusted gross profit for the third quarter was $19.5 million, an increase of $5.9 million or 44% over the third quarter of 2016, and our adjusted gross margin was 53.3% for the third quarter of 2017 versus 55% in the comparable 2016 period. Gross margin impacts were in line with our forecast for the quarter and were driven by lower ratios of Protein A ligands and growth factors and our overall product mix. Most importantly, we expect full year gross margins to be within our guidance range of 55.5% to 56.5%, consistent with our prior guidance and based on stronger growth factor volume and a full quarter of Spectrum revenues and margins in the fourth quarter. Now moving to operating expenses. On a…

[Operator Instructions]. And our first question is from Brandon Couillard from Jefferies.

Tony, you've been around this industry -- guys, can you hear me?

Yes, we can hear you.

Tony, you've been around the industry a long time. It's been through several cycles. At a high level, we'd love to get your perspective on where you think we are sort of in this current through macro bioprocessing environment. Obviously, seeing more mixed trends from many of your larger peers over the last 2 quarters. But sounds like your direct business has still been able to see some nice pockets of growth at a micro level. Would love to sort of get your view of sort of what's going on at a high level?

Sure. I think when you look at the industry, obviously, the last 6 years in bioprocessing has been just tremendous growth. I think most of our -- most of the companies in this space have grown anywhere from 8% probably, up to 14%, 15% in any given year over the last 5, 6 years. I do think that when you get into a year like 2017, especially for the bigger players, when you see some of the Phase III failures that happened towards the end of last year, they have to tend -- they have to work their -- themselves through the system if they would would've been, obviously, in the forecast for a lot of companies. I think there's clearly some inventory management going on within the biopharm industry. And I think, maybe, just trying to tie this back to the difference between our peers and maybe what we're experienced -- experiencing is a lot of our peers are very large organizations, they have a portfolio of products that span everything from commodity products to differentiated products. But I think the difference with Repligen is that we have stayed very true to our strategy of no commodities in the portfolio, really stick to differentiated products. And if you think about our sales team, our sales team is focusing on a handful of products, whereas some of the other players in the industry have a much broader portfolio. So it's just hard to put all your attention into all products. So for Repligen, I think it just comes down to our strategy. We have great products, they're very differentiated, we've stayed focused on single-use and continuous and I think our sales team is very focused and that's why we're seeing the traction that we're seeing in the market.

And so maybe for Jon, is it fair to say that maybe -- perhaps some outperformance in the direct portfolio somewhat offset by a pocket of weakness here on the Protein A ligands side that should kind of offset each other as far as guidance goes? And has anything changed as far as how you're thinking about Spectrum contribution in 2018 at this point?

Yes, no, as you mentioned, some of the Proteins businesses are a bit lumpy and that definitely had an impact as we saw some of the non-Protein businesses growing at a much faster pace in the quarter, so you're spot on there. As I mentioned, we are in line with our third quarter forecast, which is a good thing, and we expect to maintain margins for the overall year. And to answer your final question, the Spectrum business is contributing at the level that we thought it would, so no surprises there. And we're going to be excited when we burn down some of the filter inventory in the legacy Repligen business and can start realizing the margins at a full -- from a manufacturing level all the way through sales as we start to go forward here a little bit in the fourth quarter and then beyond.

Our next question is from Drew Jones from Stephens Inc.

Looking at the Protein segment, if you back out the largest customer, can you tell us if there was growth in the rest of that business?

Yes, so the Protein segment -- so we don't break it out by customer, Drew. But I can say that when we look at the Protein segment, I can sort of give you a sense of first half of the year, second half of the year. So our ligands business in the first half of the year actually was really strong. And clearly we had an anticipated lighter Q3. Kind of the inventory burn down that we're seeing in Q4 wasn't really predicted, but it's, in our mind, associated with what's going on at our largest customer in terms of their inventory management philosophy and policy has changed. In terms of growth factors, which really make up the other half of our Proteins business, growth factors had a really tough comp in the first half. So they would have been down year-on-year, but it wasn't really because there was a massive change in demand; it was more just a difficult comp. For the second half of the year, we've been able to add some new customers into our growth factor portfolio. And so we'll see in the second half of the year that growth factors will outperform H2 2017 versus H2 2016.

Okay, and then, Tony, you touched on revenue contribution from new customers in chromatography and filtration. Can you give us a better feel on the nature of this? Is this trialing? Or do you guys have some sort of line of sight to a contribution for something much longer and more meaningful?

I would say, the strategy within the commercial team is really not only working with the key accounts that we have in place today, whether it's for OPUS or it's for ATF or TangenX and now, obviously, for Spectrum and the OPUS PD portfolio as well. But there is a push within our team. And if you remember, at the beginning of the year, we said we needed to add more salespeople. And if you go back to 2015, we made the same sort of statement that we needed to add more salespeople when we started to see the impact of the additional salespeople in the second half of the year. And that's no different here in 2017. The salespeople that we've added in the first half of the year, we've been able to split the territories now and provide a little bit more bandwidth for each rep to do a little bit more hunting in terms of bringing in new accounts. So we're encouraged by the new accounts. And I would say, on the ATF single-use, really encouraged that 50% customers were newer customers. So that just really validates our thinking on the single-used portfolio that it would lower the barriers for trial, lower the barriers for entry. And we're really -- we only get the benefit this year of two quarters of the single-use 10, so I think the single-use portfolio next year will perform really well.

Our next question is from Amanda Murphy from William Blair.

I just had a couple more on the Protein side and then one on filtration. So first, Proteins. I'm just curious, what in terms of the inventory drawdown, kind of how you're getting comfort with the timing there next year in terms of how long they might be drawing down? And then I was also going to ask you about GE more broadly, has there been any conversation, just long term, about their plan? And then I have another one, actually, there. Maybe, if you could talk a bit about Purolite. Obviously, you've announced something there, so how meaningful could that be for you over the longer term?

Okay, in terms of the GE first question, obviously, we don't know how long the inventory drawdown is going to take place for -- but we have long-term forecasts from all our customers on the ligands side and the long-term forecast, when you look at 2018, 2019 are healthy. So obviously, we'll see when we get into December timeframe, when we start to get a first look at 2018 demand, we'll have a little bit more insight into, in fact, in Q2 and Q3. But my expectation is that this is more of a shorter-term event and something that's going to be prolonged. In terms of the question on Purolite. I think Purolite is a new entrant. It's been around in the Protein A resin business, our market, for a few years now. But clearly they're investing in manufacturing in terms of their ability to manufacture agarose resin, which, of course, will be used not just for Protein A resins, but it will also be for ion exchangers. I think for us, we believe that having good partners, whether it's GE or Millipore or Purolite, it's a healthy position for Repligen to be in when it comes to Protein A ligands. And so obviously, over the next 5 years, we'll see exactly how Purolite does in the market. But we're happy that they've chosen us as their partner for ligands and that they've extended the current agreement out 5 years plus, an option for three more on top of it.

Got it. And then, I guess, my one -- my last one is going to be -- I guess both are on filtration and chromatography. Obviously, you've lots of growth there. I just was curious, have you seen anything, any market response yet from competitors that, for example, on the chromatography side, have you seen GE or anyone maybe think about starting to pack other resins than their own, just given that obviously, there's a lot of potential in that market? And then same question on the filtration side. Anything in terms of what competitors are doing that's sort of changed?

Sure. On the chromatography side, Amanda, the OPUS product line is clearly the market leader. And at the beginning of the year, I think GE did come out with an equivalent of a 45-centimeter diameter column. But GE and Millipore, who have -- who both sell prepacked columns, have stayed true to their strategy, which is, they packed their resins in prepacked columns. They don't pack other folks' resin. I think when you look back at the story of OPUS, which really goes back to 2012, we've really made significant strides in the industry. And I think, to my comments to Drew about building out our commercial organization, I think the measured buildout of our commercial team really helped us. And I think now with going into a 36-strong sales team, and we will be moving to a hybrid -- all reps will carry the whole bag with some specialists in chromatography and filtrationis going to the strategy we're going to use in terms of going to market next year. So we expect that we're going to continue to maintain our market leadership position in prepacked columns. With respect to ATF, again, I think the single-use product has gotten really great reviews from our customers. So people love the ease of use. Again, we're in a market-leadership position. This isn't a small company like Repligen trying to move into a market and take share from somebody. We're actually the market leader. So for us, I think we need to continue to stay focused on how do we maintain our leadership through new product development, potentially acquisitions down the road. But we haven't really seen the impact yet of the combination of Spectrum and legacy Repligen filtration products. And we think that, that's something that will benefit us in 2018 and 2019. And finally, I think, on our TangenX business, I think that will also really benefit from the combination of Spectrum moving into our overall filtration portfolio. So I think the future is bright for us on the filtration, chromatography product line.

Our next question is from Paul Knight from Janney Montgomery.

Tony, the question I have is, you're integrating the sales force of Spectrum into your own, there were some additive things like, I think, they had more people on the ground in Asia. But as you kind of wrap that up here, are you in a position in your experience to feel like as a net neutral sometimes these are net risks on integration of these distribution people. Or do you think it's kind of a layup that it's got to help organic growth? Because their toolkit's bigger?

Yes, so the place where we have more reps is clearly in Asia; that comes across from the Spectrum deal. And we're really committed for the next couple of years to see how we make the distributor network plus the direct sales network work. We have some great distributors in various parts of Asia, and they've done a great job for us. And our goal right now is really get the whole portfolio of products into the 12-plus sales guys that Spectrum has today, plus the 2 people that we have who are playing more of a management role, and really see what happens in 2018. But I think you're right. When it comes to the next few years that we believe that 20% of our revenue synergy from this deal will come from our ability to drive further adoption of the whole portfolio in Asia.

And then regarding the expansion of Purolite, they have, obviously, announced quite a bit of capacity. And let's assume that GE stays, they've signed up for their supply as well. Is it a capacity issue with -- if Purolite reaches its goal of selling its capacity?

Yes, I really don't have an insight to Purolite's capacity and how long that capacity would last or could last or even what expansion plans they might have within the facility that they have over in Wales. I do think that they clearly are building a large facility. They've got lots of capacity and they see that they have the capability to be successful in the Protein A ligands market. And I'm sure, we're talking to GE and Millipore, they would say the exact same thing. But I think it's a healthy situation for Repligen to have the 3 biggest players in the industry of Protein A resins all procuring ligands from Repligen.

Yes. And last question is regarding the destocking in the industry, is it biosimilars, Erbitux, Avastin, in that -- is it within that sector of the market? Or is it 6 big therapeutics? How would you characterize this destocking situation?

On the pharma side, we're not the same as some of the big players, whether it's GE or Thermo or Pall or Sartorius or MilliporeSigma. So clearly, they're selling their products into those originator molecules. There's no doubt in my mind that there has to be some pressure coming from the biosimilar space. But I really don't know, Paul. I don't know if that's the main reason for some of the change in inventories. I think that's a better question, honestly, for the big players in the industry. But that said, clearly, there's destocking going on. I think Brandon said, I've been in the industry a long time and I have, and I can tell you, I saw this exact same phenomenon happened back in 2008, 2009. It lasted a year and then it moved back into, sort of, normal growth rate. So my expectation is very similar to what our peers have said. We're bullish about bioprocessing. We're bullish about this industry. And we don't see the current events in 2017 as having a long-term hangover on the industry.

Our next question is from Matt Hewitt from Craig-Hallum Capital.

This is Charlie on for Matt. First, have you had a chance to quantify the weather impact during Q3 for Repligen? I'm just trying to get a sense of the -- how much upside the weather may have prevented for you guys.

Yes, it really had no impact for us.

Okay. And then second, I was wondering, you've said in the past that new products, you start through CMOs and then that success there will lead to sales to biopharm down the line. With the Repligen brand growing and the sales force moving more direct, do you see that dynamic changing in the future?

No, I think we have the right strategy. Obviously, there's a limited number of CMOs in the industry, and there's more pharma companies, biotech companies than there are CMOs. But that said, CMOs are a big part of what we do. We value the partnership we've had -- we have with those individual companies. And clearly, our sales team, over the last 1.5 year, 2 years, we've beginning to make some inroads into the biotech, biopharm industry, and I expect that's exactly what we're going to continue to do now with a -- instead of a 14-, 15-strong sales force, we're going to have a 36-strong sales force when we get into 2018. So I'm looking forward to it.

[Operator Instructions]. And our next question is from Steve Shwartz from First Analysis.

So, Tony, it sounds like with respect to ligand A, you don't expect in future -- near-future quarters to be make up buying restocking, if you will?

Correct.

Okay. And just with respect to your capacity utilization in that area, since you've had that business for some time, I would expect you've worked in all efficiencies and what have you. So you're pretty much fully utilized, right, in terms of supply?

No, I wouldn't frame it that way. I think we continue to optimize our manufacturing operations. We've done that consistently, honestly, for the last 7, 8 years. And yes, we still have plenty of capacity within our -- to make Protein A ligand.

Okay, good to know. And then the next question, a little bit difficult given that you've done a number of acquisitions here within the past year or so, but is there a way to quantify this quarter's sales from products that didn't exist a year ago, controlling for the fact that you've acquired product lines. So what -- what are new -- how much from new products that didn't exist a year ago? And then what you think that number would be in third quarter of '18, just arbitrarily speaking a year from now?

Yes, I think, we have been carried on just this quarter alone and for the 9 months that our organic growth is 20%. So that actually takes out any of the businesses that we've acquired in the last 12 months, so that includes TangenX and it includes Spectrum. So that gives you an idea of what we've done through the first 9 months of this year. In terms of a year from now, I think it's a little early to be thinking about Q3 2018. But for us, we've always said that the long-term growth for the company is in the 10% to 15%. We've said that we expect that Spectrum can grow at the high end of that range. And obviously, when we get back in February to give you guys an update on guidance for 2018, we'll be able to do that.

Sure. Well, Tony, so that's the growth rate. But just with respect to the share of sales coming from new products, so it's really -- my question is focused more on your new product developments, commercialization and what is it currently? How is a contributing to sales? And what will that contribution be, say, a year from now?

Right. I don't have the exact percentages for you, but here's the way I look at it, and we have some internal metrics we look at. It's very challenging when you bring a new product to market and say what impact it will have in the first year, because in the bioprocessing industry, most products that you launch have a lifetime that goes out 15, 20 years, and you can -- you'll find that 5 years in, 10 years in, that you're still getting very strong growth for great products that a company will launch. So when you look at new products, we like to look at it mainly -- obviously there's a year 1 impact, and we've given you an idea for ATF of what the contribution is to the total ATF number. It'll be 15% this year that will come from the impact of new products. Obviously, we haven't launched any other new products within the OPUS family. But I would argue that 45- and 60-centimeter diameter columns in the -- are still relatively new in the industry, right? And when you're 3 years in, you literally are at the beginning phase of a more rapid adoption of technology. I don't have the percentages, but you can probably figure it out, right? Our growth that we've seen in OPUS has really come from the expansion of the whole portfolio. And then on top of that, which is not related to new products, we've been able to drive lead time and so that's really helped us on the smaller column side. But I think in general, we are getting good contribution, I don't have a percent for you, Steve. But that's something that maybe when we're at the last next earnings call, we'll be more than happy to give some percentages then.

Okay. But no, certainly, I see your point with the adoption curve being drawing out over years. It's not as easy to present that number like you could in other industries, so, okay. And then my last question is for Jon. Jon, when you talked about the bridge on SG&A expenses, the $3 million, and you broke it down into buckets, the 20% that was it related to commercial market investments, is that a number that will stay with us quarter-to-quarter? Or was it -- is it a more like onetime expense?

No, I don't think it will be an exact number as we go into Q4. But we've continue to add in commercial representatives consistently throughout the year. So there will be some element of that continuing into the future. And as we go through the integration with the Spectrum sales team as well, we'll be looking for opportunities where we will maybe able to get additional traction in the markets as well and, obviously, open to making investments in those areas going forward. It's all about growth.

Okay, so the 70% definitely stays, some share of the 20% we have for the next couple of quarters and then that remaining 10%, that's, well, that's just rounding, we won't worry about that. But -- okay, understood.

We have no further questions at this time. And I would now like to turn the call over to Tony Hunt for closing marks.

I'd just like to thank everybody for attending today and look forward to getting back in touch with everyone as we finish off the year. And see you guys at the end of February. Thank you.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating, and you may now disconnect.