Good day, ladies and gentlemen, and welcome to Repligen Corporation second quarter 2019 earnings conference call. My name is Haley, and I will be the operator for your call this morning. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to your host for today's call, Sondra Newman, Global Head of Investor Relations. Please go ahead.

Great. Haley, thank you. Good morning, and thanks to everyone for joining our call. Today, we're covering financial results for Repligen's second fiscal quarter of 2019. We'll review recent business events and update our financial guidance for the full year. Repligen President and CEO, Tony Hunt, will cover our business highlights; and our CFO, Jon Snodgres will provide a financial report. 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 risk factors is included in our annual report on Form 10-K, the current report on Form 8-K, which we are filing today, and other filings that we make with the SEC. Today's comments reflect management's current views, which could change as a result of new information, future events or otherwise. The company does not oblige or commit itself to update forward-looking statements, except as required by law. During this call, we are 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 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 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. Now I'll turn the call over to Tony Hunt.

Thank you, Sondra, and good morning, everyone. Q2 was an excellent and important quarter for the company as our team continues to execute on our financial and strategic goals. Financially, our overall performance was well-ahead of our expectations, delivering 46% organic growth in the second quarter and 42% organic growth in the first half of 2019. Strength in the quarter was across all of our franchises with filtration, chromatography and proteins businesses, each recording organic revenue growth above 40%. Throughout the first half of this year, order load has remained strong, and we are confident that the momentum in the first half, specifically in filtration and chromatography, will carry over into the second half of this year. We clearly have tougher comps in H2, including a flat proteins business, but we still expect overall organic growth for 2019 to be in the range of 29% to 31%. Strategically, we signed a very important deal in April to acquire C Technologies, which we closed in late May. This adds a fourth franchise for Repligen and moves us into process analytics with a focus on at-line and in-line protein concentration measurement. C Technologies, innovative protein concentration measurement systems also complement our systems, where we can now look to incorporating this technology into our filtration products. Integration activities are well under way, and we have made good progress on our three target areas. Number one is commercial, where our goal is to build out the sales team, so we have the right coverage in each of our main regions of North America, Europe and Asia-Pac and realize the full potential of this technology. To date, we have hired three of the seven sales specialists with the goal of completing the hiring by the end of the year. Number two is finance, where our…

Thank you, Tony, and good morning, everyone. Today, we are reporting our financial results for the second quarter of 2019, as well as updating our financial guidance for the year. Unless otherwise mentioned, all financial measures discussed today reflect non-GAAP measures. Before diving into our quarterly results, I'll take a few minutes to provide some additional color on C Technologies and our recent financing activities, including the impacts on cash, share count and EPS. First, on May 31, we closed on our acquisition of C Technologies using $195 million of cash and issuing approximately 800,000 new shares of Repligen common stock. We now expect C Technologies impact on GAAP fully diluted EPS to be a loss of $0.15 to $0.16 versus our prior estimate of a loss of $0.04 to $0.06. This change is associated with the purchase accounting treatment and timing of certain deal-related costs that are cash-neutral to the overall deal. On an adjusted basis, we now expect C Technologies to be $0.06 to $0.07 accretive to our 2019 earnings per share, compared to the previous range of $0.05 to $0.07. The reconciliation of GAAP to non-GAAP EPS for C Technologies alone includes the following approximate adjustments: inventory step-up charges of $0.03 per share; acquisition and integration costs of $0.20 per share; and intangible amortization of $0.06 per share, partially offset by a $0.07 tax effect of these adjustments. Next, in the second quarter and here in the start of the third quarter, we completed two follow-on offerings to provide the company with financial flexibility. In May, we executed on an equity raise. And in July, we executed on a concurrent equity and convertible debt offering. In conjunction with the convert, we completed a private exchange for 80% of the outstanding notes from our May 2016 convert. We…

We will now begin the question-answer session. [Operator instructions] And the first question comes from the line of Tycho Peterson of JP Morgan. Please go ahead.

Hey, good morning. Tony, I'm wondering if you could talk a little bit more about the protein business, up 40% this quarter? I think you started out talking about it being flat to down on the year. You're now talking about it being greater than 10% for the year. So can you talk about what you saw in the quarter on protein? And then, I guess, going forward, should we think about it being back to kind of growth mode, looking a little bit beyond the back half of the year?

Yes, sure. So if you think about the proteins business, Q1 and Q2 were actually very different. In Q1, we saw a very strong growth factor business with reasonable single-digit growth in the ligands piece. And then when we got to Q2, it really was all about ligand demand right across the board with both GE and Milllipore having very strong demand in the quarter. We were expecting that the first half of the year was going to be stronger based on forecast. It definitely came in a lot stronger than we were forecasting. And when we look at the second half of the year and we look at the forecast, we can see year-on-year H2 2019 versus H2 2018, that's essentially going to be flat. And obviously, with the strength we saw in the first half, overall growth for the year is definitely going to top 10%. Now that said, when we move into 2020, as we've spoken about in the past, GE has the option to move up to 50% of their proteins demand, ligand demand in-house. So we expect, as we go through 2020, that some of that volume is definitely going to move across. So I think we'll have a better idea, Tycho, when we get to the end of the year and early February next year exactly what the GE demand is going to look like in 2020. So for now, I think it's a very good year in 2019. I don't think it reflects where proteins is going to be in the future. And I think our real future in proteins is really around the strategy we put in place last year with Navigo and Purolite and developing our own portfolio of affinity ligands, and we expect that those will begin to ramp up. We're seeing some ramp this year, but we'll definitely see an additional ramp next year.

And then it was interesting to see gene therapy. I think you called it out at 25%. And last time, I think it was 15%. So can you just talk a little bit about what you're seeing in that market, how quickly you think you can kind of capture share? And what kind of investments you need to make around the gene therapy business?

Yes. The gene therapy market, a year ago, when we talked about it, it was really beginning to take off, but it was still a very small percent of our overall business. The 25% comment in my prepared remarks was around the Spectrum business in Q2. But for sure, when you look at all our products, we're in a good position in gene therapy. And just to be clear, our focus in gene therapy is really around viral vectors and plasmid manufacturing, less so in the CAR-T side of the equation. But in general, I think we have three or four products in our portfolio that really address some of the pain points that exist in gene therapy today. So our OPUS pre-packed columns, people really like the convenience of being able to have all the resins pre-packed and ready to go. Our ATF and hollow fiber product lines are doing very well, both upstream and downstream. Our flat sheet cassette business, which is the TangenX business, is well suited to downstream filtration. And when we look at our systems business that we really pulled together in the second half of last year, we're able to sell now systems with our consumables into this customer base. So when you look at overall gene therapy for Repligen, I would expect that probably by the end of the year, close to 15% of Repligen revenue will be coming from gene therapy accounts.

Okay. And then lastly, are you able to give an order growth rate? I know you gave us one last quarter. I didn't hear that in the prepared comments.

Yes. Across the board, I mean -- or I don't have an exact growth rate, but orders were very strong across the board. Very similar to what we saw probably coming out of Q4 into Q1, probably not as strong as the Q2, but still a very healthy pipeline of orders going into Q3 and Q4. So we're -- I think there's a lot of confidence about our numbers that we've put out for the second half of the year, and a lot of that is coming from a strong order load coming out of the first half into second half.

Your next question is from the line of John Kreger of William Blair. Please go ahead.

Hi. Thanks very much. Tony, just building on your comments about the proteins business in 2020. So given the substantial ramp in growth that you've seen this year over the last, can you just talk about some of the key bottlenecks you've got in the organization to growth? I'm assuming there are some. And are there any other kind of key things you want to call out as we think about '20?

Yes. So the -- I think the question is probably broader than proteins, John. So if I look at investments we need to make, we're actually making them. So as we finished off 2018, it was clear to us as we saw the order load. There was a few areas that we wanted to invest. And one was definitely on the pre-packed column side. So we've been ramping up with people in the first half of the year. So we've been able to add in a second shift for OPUS, and that's really increased our overall volume of output. But I think as we see visibility from customers around what they want, in 2020, 2021 and 2022, it became clear to us that we really needed to scale OPUS manufacturing by four- to fivefold. And that's why we're adding in four suites by the end of this year, an additional nine next year. So that's a big investment for us but fully supported by the demand that we're seeing out in the marketplace. To really free up some of that demand, we made the decision sort of mid-Q1, early Q2 that we would utilize our Marlborough facility, which is really our center of excellence for filtration and move the ATF products and centralize all filtration products outside what's going on in Rancho and hollow fibers in Marlborough. That will be in place by the end of the year. And then the rest of our investments have really been around systems, right? So SAP is a big investment for us. We're really happy with the progress we've made. We're at a point now where the East Coast will go live in Q3, and then we'll basically transition then over to bringing the legacy Spectrum sites online in first quarter of next year. So they are the main investments that we're looking at. I think they're going to play out probably not only this year, but also into 2020. But it's what is needed to happen, in addition to bringing on additional people so we can stay ahead of the demand curve.

Great. So if you think about your direct business, do you have a view on the sort of sustainable growth that it could support? I'm assuming it's too soon to have a view on sort of demand trends into next year. But what -- could the direct business support, let's say, 20% growth? Or is it too soon to call that?

Yes. So it's definitely a little early. But I think given what we've done, and if you look at 2017, our filtration and chromatography businesses had organic growth of 20% plus. Last year, it was north of 20%. This year, you can see, obviously, through the first half of the year, it's about 35%. So I think a 20% growth for chromatography -- organic growth for chromatography and filtration is absolutely a reasonable assumption. That's something that we aim to do. Obviously, we'll have some headwinds next year with the proteins business. And obviously, to be able to counter that, we have to continue to overdrive on filtration and chromatography. And obviously, the C Tech piece begins to play a role next year as we get a full year of C Technologies in the business.

Great. And one last one. When do you expect to roll out the new TFDF product?

Yes. That's going to happen toward the end of this quarter. So we're in the final stages of the marketing rollout. So by the time we get to November, we'll be able to give everybody an update on the first couple of months of TFDF.

Thank you.

Your next question is from the line of Matt Hewitt of Craig-Hallum Capital Group.

Good morning. Congratulations on the strong quarter. Just a couple for me, and the first one being a point of clarification. I think last quarter, you talked about adding six large-scale manufacturing suites for OPUS in Massachusetts. It sounds like you're going to expand that further. Did you say four online by the end of this year and nine by the end of '20, so a total of 13. Or is it a total of nine, so four this year and five next year?

So you're right. It's 13. It's four this year and nine next year. We will add essentially 10 additional suites into Waltham and three into Europe. And one of the decisions we made based on the continued uptick in demand was to centralize our OPUS manufacturing, not in Ravensbrück, but in Breda, where we actually own the facility, and we have a lot more space. So that was a small shift that we made but I think an important one for us for the long-term growth for OPUS and to be able to serve the European customer base.

OK. Thanks for the clarification. And then as part of that expansion, are you factoring in maybe opportunities to expand that OPUS line? Or is this just for the -- is the expansion just for the existing OPUS line?

Well, it covers both. It's definitely the existing product lines. But obviously, we have products in development that will continue to expand the overall OPUS portfolio. So it will manage both.

Okay. All right. And then maybe last one here. As of last quarter -- and you may have just touched on this in the prior response. But at the time of your last call, it sounds like you were evaluating whether to transfer some additional products to the Marlborough facility. Are you still looking at that? Have you made any decisions, anything on that front?

Yes. I think when we spoke the last time, we've always said that the Marlborough facility is our center of excellence for filtration. And the Rancho facility, which is the Spectrum facility, that's our center of excellence for hollow fiber modules. So it made sense to us, as we looked at the capacity expansion plans that we have in place, to move the ATF filtration basically 20 miles down the road to Marlborough and centralize it where we've all the engineering people together. We have the operators together, and we can really leverage the team that we have there.

Got it. All right. That's it for me. Thank you.

Thanks, Matt.

Your next question is from Brandon Couillard of Jefferies. Please go ahead.

Thanks. Good morning.

Morning, Brandon.

Tony, if we just look at the outperformance in the second quarter, clearly, based on other peer reports, the markets in bioprocessing are clearly doing quite well. How much would you attribute to just a better market environment versus Repligen-specific drivers?

I definitely think it's a bit of both. When you look at the overall market environment, it's really accelerated from where our industry was in the first half of 2017. And you could almost say all of 2017 and through the first half of 2018 was pretty tough for everyone. But then we saw last year, as we got into the second half, that our organic growth began to pick up, and I think that's a reflection, too, of the strength in the market. So for me, we look at it really from a mAb point of view. We think the gene therapy customer base has accelerated, right? There are a lot of companies really working on viral vectors. So that's absolutely helped. We also have a portfolio of products that are very differentiated in the marketplace. So I think that's the piece that gives us the kind of the above-market growth that we've seen over the last few years. So when you look at what we're doing with OPUS, what we're doing with ATF, what we're doing with our hollow fiber portfolio and systems, it's pretty unique. And I think that's what allows us to be able to grow at above-market growth rate. And then I think the final part was the commercial integration that we did last year. We paced it. We didn't try and integrate Spectrum and Repligen sales teams all at once. Remember, we went sort of Q1, Asia; Q2, Europe; Q3, North America. So when you think about the last sort of 12 months, we've really just gone through 12 months now with fully integrated commercial team. And that has really helped us having everybody selling the whole portfolios complemented and supplemented by specialists.

And then given your balance sheet capacity, you sort of speak to your willingness or appetite to perhaps pursue another M&A opportunity kind of what the funnel looks like there and just internally, your ability to perhaps absorb another deal?

Yes. So M&A, obviously, it's a big part of what's gotten Repligen to where we are today. Purely with $500 million in the bank, we are in a good position as we look at assets. The M&A situation in 2019 is no different than it was in 2018. We have an active list of companies that we're talking to, but it's no different than 2018. We'll continue to talk if there's a really good opportunity that pops up. I think we're well-positioned to be able to execute on it. And obviously, a lot of focus right now is on the C Tech integration, but I think it is probably more straightforward than the Spectrum integration, which was a much bigger integration for us. So we'll see what happens. But I think expect over the next few years that we'll pace acquisitions very similar to what we've done in the past.

Thank you.

Your next question comes from the line of Paul Knight of Janney, Montgomery, and Scott. Please go ahead.

Hey. Tony, on the CT transaction, I guess can you talk about basically how easy you think this will be to integrate in your customer list? And is it -- they have seven salespeople. You need to sign up all seven and three are done? And could you talk basically about how easily you can tuck it into more and more installations in the industry as you have done with your other acquisitions?

Yes. So C Tech is we're really early innings of doing the integration. So Craig, the C Tech owner and who stayed on and is running the whole business, they've built up a great -- not only a great portfolio of products, but a really great customer base. One of the challenges they have is that the actual selling organization, number of salespeople is relatively small. So one of the things that we have to do to really help them grow beyond what they've been able to do over the last, say, four or five years has really built up this commercial team. And that's what our No. 1 focus is. And our goal is to bring on around seven salespeople. So think of them as specialists, very like our BSS model that we have for filtration and chromatography. They'll come online by the end of the year, and that will position us well for 2020 to be able to grow the business with dedicated specialists in North America and dedicated specialists in Asia and dedicated specialists in Europe. And so the call points, there are some overlap on the call points, especially in the manufacturing setting, but they also have some new call points in the quality-control labs, in the formulation labs where we don't call on today. So I expect that when we get into 2020 that our existing bioprocess sales team will be working hand in hand with the specialists. Let's call them C Tech specialists, which really are process analytics specialists to call on the -- hit the call points where -- that are in common, but also be able to accelerate with some of the new call points, which will be in quality control and formulation. So it's a bit of a process, Paul. It's going to take us the best part of this year to really set ourselves up for 2020.

Your next question comes from the line of Steve Schwartz of First Analysis. Please go ahead.

Good morning, everyone. So the two questions I have actually expand on some previous questions, if we could. Just with respect to, Tony, your comments to Tycho's question about gene therapy. In the cell and gene therapy arena, do those orders to the products you ship, are they significantly different from your traditional markets, if you will, of mAb production, protein production? Are the unit pieces that the components smaller and maybe in higher numbers for an order count, that sort of thing? That's the nature of my question.

Yes. So the products are essentially the same. I just think some of the gene therapy accounts are working on a smaller scale in, say, some of the mAb accounts, but it's very similar. And so when we're selling OPUS columns, we might be selling eight-centimeter diameter to 30-centimeter diameter columns. And some of the mAb processes, we might be selling 45, 60s and 80s. So yes, there's a little difference in terms of the size, but it's essentially the same products going into upstream and downstream applications. And I think that's one of the real benefits that we have is that we have a portfolio of products that are very applicable into the gene therapy space, and our sales guys are very aware of where some of those opportunities are. And I think, we've been able to execute on that. And I think very similar to our peers in the space, I think everybody is very, very busy working with the gene therapy customer base.

Okay. Fantastic. Yes. And 15%, is 15% of revenue. So -- but glad to hear about that makeup. What makes that up? Second question, just building on Brandon's question with respect to M&A activity in your capacity there. When you talk about the integration and the transformation of C Tech to public company standards, is that being done by the people who carry other roles in the organization? So is it an add-on activity for your staff? Or are you hiring people specifically to handle that activity? And what is your capacity in that regard, that side of maybe executing on the $290 million net that you have?

Yes, Steve. So I'll start with that one. In terms of the capacity to handle the changeovers to public company standards, we're leveraging some of the resources that we have internally to help position the team and guide them to where we need to be to get up to Repligen standards. But we're also hiring people locally to help administer that and put those programs in place. So it's really a combination of the two, guidance from the current team that we have and leveraging that. And then actually, the heavy lifting and implementation work is mostly going to come from that local team, and we're really happy that we've made one excellent hire so far, and we continue to look for others. And then I'll pass it back over to Tony on -- in terms of M&A.

Yes. Maybe, Steve, do you want to repeat the question on M&A? I'm not sure.

Yes. Just so -- so with that being said about who is executing these activities and what's your capacity then, now that you have -- you've taken out some additional cash, and you have some more powder in the CAG, if you will?

I think it's similar to what I said earlier, I don't think 2019 is any different than 2018. We're actively talking to targets, and we'll continue to do that. We were doing that last year as well. And it's just -- it's all around timing. It's all around finding the right fit and then reaching a sort of an agreement on what works for both companies. So it's no different. I really think that our pacing on M&A is going to continue to be similar to what you've seen over the last four or five years. Every 12 to 18 months, I expect that we'll be executing on a deal.

Yes. If you could flavor your M&A pipeline for us at this point. Is there any particular bias that you sense with respect to filtration, chromatography or the now newly developing area for you of process analytics?

Yes. I'm sure you'll smile as you hear my answer. But in general, we see opportunities in filtration. We definitely see opportunities in chrom. And obviously, we're just starting in the world of process analytics. And so when we talk to customers, it's our two companies, they span all three, right? And so we're not trying to target one versus the other. It's really trying to address some of the gaps that we see that -- and opportunities that we think are out there.

No. That's very helpful. Okay. Thanks for taking the questions.

Your next question comes from the line of Raghuram Selvaraju of H.C. Wainwright. Please go ahead.

Good morning. This is Edward on for Ram. Just a clarifying on the last point about process analytics. Considering that C Technologies are still being fully integrated into the process. I'm wondering if you're considering -- it sounds like you're still considering M&A into the process analytics space? And might that change as you fully integrate C Technologies and see where they fit in with the synergies around the entire business?

Yes. Like all our product lines and all of our businesses, we jumped into the process analytics space. C Tech made a ton of sense for us. We believe in process analytics. We definitely would like to continue to expand that portfolio led by Craig, and it's just really one of those timing things, and we'll see what happens over the next couple of years.

Okay. And just a point that you've previously mentioned about having a $2.1 billion total addressable market represented by the segments that you're currently in. I'm wondering if that's considering what you currently have on hand? Or whether there are -- whether you're looking to expand into other areas that would fully bring you up to that $2.1 billion total? Or if that $2.1 billion addressable market is based on things that you would be pursuing in the future?

No. It's definitely based on where we are today, and it's our addressable market today based on the products we have in our portfolio and where we're going with those products.

Okay. So the future addressable market would just increase based on some of the things that you're seeing for any M&A activity or how the market might shift in the future?

Yes, correct.

Okay. Do you have any guidance toward how big that market might be? Or is it entirely dependent on how things might change?

I think it's really entirely dependent on how things might change, but the bioprocessing market is way bigger than $2.1 billion, probably around $8 billion to $9 billion. So you can imagine there's a lot of runway to jump into some other areas in the world of bioprocessing that would expand our overall TAM.

And congrats on another great quarter.

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

I'd just like to thank everybody for joining us today. Obviously, a very strong start to 2019. I think we're really well-positioned also for the second half of the year, and we look forward to getting back on the call with everybody in November and bringing up to speed on where we are as we finish off 2019. So thanks, everybody, for joining.

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