Good day, ladies and gentlemen, and welcome to the Repligen Corporation's Year-End and Fourth Quarter of 2019 Earnings Conference Call. My name is Rocco, and I will be your coordinator. [Operator Instructions]. Please note, today's event is being recorded. I would now like to turn the call over to your host for today's call, Sondra Newman, Global Head of Investor Relations for Repligen. Please go ahead.

Great. Good morning, everyone. Thanks for joining our call today. On this call, we'll cover our financial results and business highlights for Repligen's fourth fiscal quarter and full year 2019, and we'll provide financial guidance for the year 2020. Our President and CEO, Tony Hunt, will cover business updates and our CFO, Jon Snodgres, will cover our financial results and guidance. As a reminder, the forward-looking statements that we make during this call, including those regarding our business goals and expectations for 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 filed today and other filings that we make with the Securities and Exchange Commission. Today's comments reflect our current views, which could change as a result of new information, future events or otherwise. And the company does not obligate or commit itself to update forward-looking statements, except as required by law. During this call, we are providing non-GAAP 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. The non-GAAP figures in today's report include revenue growth at constant currency, gross profit and gross margin, operating expenses, including R&D and SG&A, operating income and operating margin, income tax expense, net income and earnings per share as well as EBITDA and adjusted EBITDA. These adjusted financial measures should not be viewed as an alternative to GAAP measures, but are intended to better enable investors to benchmark Repligen's current results against historical performance and the performance of peers. Now I'll turn the call over to Tony Hunt.

Thank you, Sondra. Good morning, everyone, and welcome to our 2019 year-end update. We are delighted with the way we finished off the year with 21% organic growth in the fourth quarter, 33% organic growth for the full year and overall 2019 growth for the company, coming in at 39%. All 3 franchises accelerated in 2019 as we benefited from customers scaling up on mAb processes and new customers implementing our technologies, especially in the area of gene therapy, where we now have greater than 50 significant customers today and just as many smaller customers. Throughout the year, our team continued to execute on our long-term growth strategy with M&A and R&D remaining at the core of our success. In 2019, we completed our acquisition of C Technologies, establishing an important new vertical for the company in process analytics. Our R&D team delivered TFDF filtration technology, a game-changing technology and harvest clarification, an area that has seen little innovation over the last 10 to 20 years. Supporting our growth strategy and operational investments in 2019, we completed a series of financings that leave us with over $500 million in cash at year-end and positions us well for the future. Looking back at the year, there were 5 key drivers of growth. First, as I mentioned, we saw strong adoption of gene therapy accounts where we help to deliver yield and efficiency improvements in viral vector manufacturing. Gene therapy represented approximately 15% of our overall 2019 revenue with filtration products accounting for 60% and chromatography products accounting for 35% of sales into these accounts. We saw a fairly even split between CDMO and gene therapy developers at 52% and 48% of revenue, respectively. And with the strong base of core customers and differentiated technology, we are really well positioned for growth…

Thank you, Tony, and good morning, everyone. Today, we are reporting our financial results for the fourth quarter and full year 2019, as well as providing our financial guidance for the year 2020. Unless otherwise mentioned, all financial measures discussed reflect non-GAAP measures. As you've seen in our press release this morning, we delivered strong financial performance for both the fourth quarter and full year 2019. We had another strong quarter with revenues of $69.5 million, representing 34% reported growth and 21% organic growth. For full year 2019, we reported record revenue of $270.2 million. The year-over-year increase of $76 million represents 39% overall growth, including 2 points of foreign currency headwind and 33% organic growth, $16 million or 8% of our revenue growth was attributed to our June 2019 acquisition of C Technologies. Operationally, we continue to prioritize key areas of investments in the company. In 2019, 7% of revenue supported R&D programs that continue to produce disruptive technologies, like our new TFDF platform that we launched in the second half of the year. We also made important capital investments in our manufacturing sites, with a significant portion of our spend dedicated to increasing overall production capacity and expanding and upgrading our IT systems and infrastructure. Now to provide more insights into our overall financial performance. As Tony mentioned earlier, our direct-to-customer franchises continue to perform well. Our direct products represented 79% of the company's total revenue in the fourth quarter and 76% for the full year compared to 72% for full year 2018. On a regional basis, for the full year, pro forma direct product revenue growth was fairly consistent across regions, with approximately 30% growth in North America, Europe and Asia. For the full year 2019, Asia represented 16% of direct revenue, while Europe and North America…

[Operator Instructions]. Today's first question comes from Dan Arias of Stifel.

Maybe just to start on guidance. 32% organic is a pretty big year. So obviously, you have a tough comp there. When you look at the momentum that you're exiting 2019 with though, can you just talk about the approach to the 2020 outlook in terms of being conservative or not conservative? And then how you feel about just the shape of the business and the drivers that you have relative to this time last year when you guided to, I believe, 13% to 17% organic growth. So less than half of what you ended up doing?

Yes. Thanks, Dan. Yes, I think in general, we finished off the year. We had good momentum through the second half of the year. I think as we looked at 2020 guidance, I think it was important for us to really gauge what was going on in each of the businesses, right, in each of the divisions. So within chromatography and filtration, we feel pretty good about it. Our OPUS business came off a massive year last year, up over 50%. And our filtration product line also had a really, really big year. So we've got really difficult comps in 2020. We expect that our filtration franchise will grow 25%. We think that our OPUS franchise will grow 20% plus. Our proteins business is probably the main headwind that we have and so we know we have a 4% to 5% headwind going into 2020. So if you take our 10% to 14% guidance. And we didn't have that headwind, we would really be doing 14 - 15% to 19%. So we think, actually, the guidance we're putting out there right now is very realistic. While we feel really good about our businesses, really good about our products, we think this is the right guidance for us. To your second part of your question about last year where we guided mid-teens, and we came in at 30%. I think the piece that really surprised us last year was the proteins business, right? And we had guided down 5%, and it came in really, really strong. So if you take that out of the equation, it would really drop down the overall organic growth pretty significantly. So I think that was a big factor. I think the other factor last year is that no one really in the industry predicted how fast the gene therapy market was going to grow. And I think we all kind of missed that a little bit. And so that's kind of the explanation for last year.

Yes. Okay. That's actually my second question. Just on gene therapy, is there some color you can give on just how you feel about the expansion and the evolution of that market in terms of new activity and the scale of our project work. And then I guess, along those lines, I mean, one of the things that it sounded like you were trying to stay grounded on last year was this idea that a lot of things went right in 2019 in that field. And that, that always doesn't happen, Phase I don't always go to Phase II, et cetera. So I guess the question is that sitting 2 months into the new year, how are you looking at things relative to the way that you would have hoped they would have been 6 to 12 months ago?

Yes. I think when you look at how we finished in Q4, the gene therapy customer base was again strong for us in terms of shipments, in terms of orders as we - it's difficult for us to see much beyond the first half of the year. We know, as I said earlier in my prepared remarks that we know there are some significant scale-up programs that are happening in the second half of the year. But in general, we haven't seen any slowdown in gene therapy, and we're expecting gene therapy will drive - will grow about 30% for us in 2020.

Okay. It sounds like you've given the three questions here, so I'll take the opportunity. Maybe just on TFDF, that sounds like it's one of the more meaningful products in the portfolio these days. So what is the thought on just the industry coming around to the dual filtration benefit that you get there. My sense is that, that might take 1 year or 2 for that to ramp and be a material contributor. Is that the way that you're thinking about it? And then what does the runway look like if you wanted to look beyond just this year and into 2021 and 2022?

Yes, I think you have it spot on. The - it's going to take a couple of years for TFDF to take off, but we've got a significant number of trials lined up here in Q1. We expect it will generate $1 million, $2 million in revenue for us this year. But every year, going forward, we expect that revenue will double. And so it's not one of those product lines that we expect to grow at 20%, 25%, 30%. We expect that over the next few years, this is a technology that's going to scale quickly. But obviously, we've to get through the trials, we've got approved the technology. We've done that so far, but on a limited basis, and I think we're very confident that the technology is going to be a key technology for us. That said, I wouldn't underestimate the rest of the product launches that we're bringing to market this year. So we really are bringing innovation in ATF. We're bringing out the next-generation FlowVPE technology in the second half of the year. We've got new ligands coming through. We've got next-generation, CS gamma. Really feel this year is a key year for us in terms of product launches that will set us up really well for 2021 and beyond.

And our next question today comes from Puneet Souda of SVB Leerink.

Tony, thanks for the question. So first one on, if I could touch on C Tech in terms of your expectation of the - of that product after the increase in the sales force. When we look at the number you provided for 2020 in light of sort of the growth that you're already seeing in the business, and what you're going to see and the second half acceleration? Just help us understand why is that number for 2020 C Tech a little bit conservative than sort of given the efforts of sales force behind it? And when can we realistically see acceleration in that piece of the business?

Yes. So C Tech, let's - just to maybe take a step back. So when we did the acquisition, we really felt that the second half of the year or the 7 months of ownership, we would be somewhere between $16 million and $17 million, and we came in at $16.4 million. Long conversations with Craig and the team down in Bridgewater, and it was pretty clear that as we did the deal that they were at that inflection point where one salesperson and distributors around the world was just not going to be able to drive the growth that they had seen in prior years. So they had a fairly slow first half of the year. So the $32 million projection for us in 2020 is 25% growth. So I think it's really - that's a really meaningful growth number for C Tech. Now I'm totally thrilled that we've been able to get 10 - 9 additional salespeople on board by the end of 2019. They're all getting up and running, and we expect second half of the year that C Tech will be stronger than the first half of the year in terms of revenue. And I think when we get later in the year, we'll have a much better sense of in 2021 and 2022, how fast can this technology or product line grow, but we expect it's definitely a 20% plus grower going forward. And it just really comes down now to not only how fast we can accelerate adoption of SoloVPE outside North America, which is predominantly where the technology is being sold over the last few years to also the rapid deployment of the next-generation version of FlowVPE, which we are really bullish on, and we think that's got a lot of potential, especially in the out years.

Okay. And then on China, if I could ask, I appreciate your comments on first quarter. But I was wondering what's your supply chain exposure in China? And what's your expectation there for the next couple of quarters? How that changes?

Yes. On the supply chain side, it's pretty minimal for us. We don't have a lot of products that are coming into our supply chain that's made in China. So there are some, but it's small in the grand scheme of things. So obviously, we continue to manage that. On the revenue side, it's really just dealing with potential shift as we finish on Q1 and go into Q2. And in general, our exposure in China is about 5% of our revenue, which, if you just average it out over 4 quarters, it's about $4 million a quarter.

Okay. And then last one, if I could ask on gene therapy. Obviously, a strong business for you. You mentioned 15% overall mix. So when looking at the products and hardware needed to scale up in the scale-up phase, do you think you have the right optimal portfolio serving that market? And maybe if you could talk about the new product launches? I know it's a little, still a bit early, but 2020 being an important year here. Are number of those products going to serve that segment? Just help us understand how Repligen can continue to seize or grab growth from the cell and gene therapy expansion that's happening here in the end market?

Yes. So to maybe clarify on this. We definitely play in both cell and gene therapy are predominantly in viral vector manufacturing. So that's kind of the focus area for us. In terms of our current product portfolio, I think we actually are very well positioned. Obviously, for the last 5, 6 years, almost all our conversations at the investor level has always been around monoclonal antibodies and a little bit on vaccines and clearly, over the last year, gene therapy has become an important element for us and a vector for us. So if I look at the products that are coming through this year, probably the CS gamma technology that is the flat sheet cassette gamma radiated that's going to be targeted right at our gene therapy customer base. And obviously, our filtration products, as you can tell from the 60% of gene therapy revenue for us coming from our filtration portfolio. That anything we do on filtration is going to have an impact and benefit to the gene therapy customers.

And our next question today comes from Tycho Peterson of JP Morgan.

This is Julia on for Tycho. So maybe, Tony, just to start off, regarding the seasonality of the protein business in 2020. I know, obviously, you had some heavy pull forward into the first half of the year, last year. So for 2020, should we expect the seasonality to mirror that of 2019? Or do you expect a different pattern given the GE ramp down?

Yes, I would say, in general, on a - on how you would break up the quarters. Typically, Q2 is stronger than Q1, Q3 is light, and Q4 is maybe similar to Q1, right? That's the way it's been for the last number of years. I don't expect that, that's going to change. The difference is, obviously, that we will be seeing and are seeing GE volume reduction, right? And that's - we're seeing that in Q1, expect to continue to see that through the year. And we still believe that it will be $12 million to $13 million of a headwind by the time the year is done.

Okay. And then regarding the capacity ramp, could you give us a sense of how quickly will the new OPUS capacity ramp up in 2020? And what should be the expected sort of gross margin cadence as new capacity is added in sales?

Yes. So on the capacity side, I think the good news for us and for our customers is that we really - you can see it now, right? Our number of columns doubled in terms of output in 2019. So 1,400 comps versus 700. And as we were going through 2019, we knew we needed to move quickly. And so in Q4, 5 OPUS suites were brought online. That essentially gives us additional capacity as we move into 2020. Our lead times have come down significantly. We're in a much better position now than we were, say, a little over - a little less than a year ago. I think the big thing for us on margin has really been the shift that we saw in 2019 where customers, in particular, in North America, have started to send chromatography resins to us. And so our OPUS margins definitely improved in 2019. We expect that, that's a trend that should continue in 2020. Probably what we ended up in the Q3, Q4 combined were that we saw a real bump up. I think that's probably the level that we're going to see. And so we're not expecting that the new capacity that we're building out in 2020 will really come online until late Q3 into Q4. So what we're doing in Europe is really end of the year, start-up the additional suites that we're going to build out here in Waltham is really second half of the year. So we're our capacity expansion plans in 2020 are really with an eye on 2021 and 2022, not really on what's needed to make 2020 a success.

Got it. That's very helpful. And then lastly, a follow-up on gene therapy. I mean, given there's a significant sort of a gap between supply and demand in this industry, are you actually seeing that translating to increased pricing leverage on your end?

Yes. Our products, we're - if you look at how we price our products, whether it's in mAbs or gene therapy, it tends to be very much the same. So there's really not a whole lot of pricing leverage that at least we're seeing at this point.

And our next question comes from Paul Knight at Janney Montgomery Scott.

Jon, I didn't catch that CapEx number for 2020?

$20 million to $22 million.

Okay. And then Tony...

That's totally - sorry.

Sorry. Go ahead, Jon

No, I say it's really year two of our capacity expansion program. So we expect the higher CapEx to go through 2020. And then return back down to more normal levels in 2021.

And then Tony, regarding OPUS 80 in the commercial market opening up, does that make your predictive analytics easier? Is it a larger order? Is it a chunkier standby order? How does OPUS 80 help your predictability?

Yes. So OPUS 80 has tracked very similarly to the OPUS 60 product. And the first year you launch, you get a handful of customers that jump in and say, yes, I need the larger column. So last year was actually a significant bump up. And what OPUS 80 has done for us has really opened up Phase III and some commercial opportunities. So while the revenue for an OPUS 80 column is definitely more than what you would get for an OPUS 45 or 60, the repeatability of that order is not something that you would expect to see year in, year out because customers are running these columns now for a large number of cycles. So it's really - think about our OPUS 80 columns is really replacing the last columns that would be used in Phase III or commercial processes. So the expectation is that they'll behave and last just like the normal length of time, you would expect to see it last column - lasting. So great to be in. I think I've said this a few times over 2019, I think having OPUS 80 in our portfolio has changed the way people think about prepacked columns because now they know they can go, at least for some processes, all the way through to Phase III and into commercial.

Okay. And then lastly, the Purolite relationship is that factory getting busy in England for Purolite. Can you tell?

Yes, I think it's still early days in terms of the impact of their protein A resins. I don't have the insight on - in terms of how busy the factory is. I will say that the activity in the field in terms of evaluations using the NGL-Impact A ligand has been really strong. And I think the feedback from customers has been really good, and we expect that we'll see really good growth in NGL ligand revenue in 2020 versus 2019, but it's kind of a long process. It doesn't happen overnight, but we expect that this is a ligand that's going to be in the market and combined with the Purolite resin is a resin that's going to be in the market for the foreseeable future.

Our next question comes from John Kreger with William Blair.

Tony, given all the expansion in the pipeline for gene and cell therapy, has your thoughts changed at all on overall bioprocessing market growth? Are you still viewing that kind of high single digits?

Yes, I think it's - I still think we view it in any given year is anywhere between 8% and 12%, right? And it just depends on the year, whether it's a 10%, 12% year or an 8% year. So I think it's probably added 1 to 2 points on to the overall market. That's kind of our assessment.

Great. Thank you. And maybe to clarify the way you guys are thinking about China. Are you assuming any hit and factoring that into your guidance for the full year? Are you really just sort of assuming maybe a shift from Q1 into Q2 or Q3?

Yes. It hasn't changed our guidance for the year. But I think everybody is in the same sort of place right now, which is no one really knows how long this is going to last. So I think when we get to the May earnings call, I think people will have a much better idea of what the impact is going to be in the first half. I think for us, we clearly see it as a shift. We've seen no orders getting canceled. It's more around companies that are not up and running at full speed versus where they were in Q4. And so it's that potential delay or shift from Q1 to Q2 that I think will happen for us. And depending on how basically what happens over the next few months, we'll probably tell a little bit more of what's going to happen first half of this year versus second half of this year.

Okay, great. And then one final one. We hear that yields for gene therapy production are way below where monoclonal production is these days. Assuming you agree with that view, do you have a role to play there when you sit down with clients, do you have products that you could plug in that will allow improvements on that front?

Yes, that's almost - when you talk to any customer, especially when they're looking at optimizing processes, yield is close to - yield and purity are the top 2 parameters that people are looking at. It's probably a little unfair to say gene therapy yields are really poor and - versus mAbs. mAbs have been around since the 1990s, it's gone through 30 years of optimization. It's a really well-understood manufacturing process. So the fact that the gene therapy manufacturing clients need improved yields is really no surprise, but my expectation is with the technologies that are out there, technologies that we, at Repligen, have. They are the things that we can work on. And you will see yield improvement happening in 2020 and then over the next few years. And if you went out 20 years from now, I'm sure gene therapy yields will be just as predictable as mAb yields are today.

Our next question comes from Matthew Hewitt, Craig-Hallum Capital Group.

Most of my questions have been answered, but I do have one follow-up on gross margins. I think, Tony, you were talking a little bit about how in North America, you've got the customers now sending the resins directly to you. I'm just wondering, as you get the expansion completed in Europe? Will there be an opportunity to do something similar there? And what could that mean to gross margins, maybe not necessarily this year, but as we look at 2021?

Yes. I mean, that's exactly what I think will happen is that once we build out in Europe for OPUS will get - it'll be much easier for customers to either ship or transport resins. We're doing it today, but it's - logistically, it's simply a little bit more challenging versus if you have in-country manufacturer, in-manufacturing or in-region manufacturing. So that will definitely improve margins. I think that contrary to that is, of course, we're dealing with the lost volume that's coming from GE. So that has some margin depression. So it's - at least in 2020, the impact from GE is probably more than offsetting any goodness that's coming through on something like OPUS.

And our next question comes from Raghuram Selvaraju of H.C. Wainwright.

This is Edward Marks on for Ram. Most of our questions have been answered as well. But just one follow-up. Do you still expect to reach your long-term revenue objectives based on this sort of organic growth that you've seen in 2019? And then based on your guidance for 2020?

Yes. I mean, our long-term growth, our revenue projections are definitely based on being in that 10% to 15% organic growth, but also supplementing it with M&A. So for us to get to where we believe we need to be is going to require additional M&A over the next few years. We also believe that the products that we're developing, and especially the products that we're launching here in 2020, will allow us to grow at the higher end of our 10% to 15% long-term organic growth range. And we're not as reliant on M&A as maybe we were in 2014, 2015. But just to remind, when we were in 2014, we were saying $50 million to $200 million to $250 million by 2020. We're ahead of that pace. And our expectation is that we're going to continue to execute on this blueprint up. Great products in the marketplace, very focused on technology innovation, getting new products out and then doing select M&As as we go through the next few years.

And our next question today comes from Jacob Johnson of Stephens.

Clearly, a lot of growth coming in cell and gene therapy, just on capacity. Are the current investments you're making at OPUS and in filtration enough to handle kind of what you're seeing as you look out over the next couple of years? Or should we expect additional investments here in the near future?

No, I think we're - we took a real step back and looked at what we needed to do back in Q2 last year, and we put a plan in place that goes out over 5 years. A lot of the capacity expansion that's happening this year is really geared towards - with a 3 to 5 year horizon. So we think we've got the right plan, obviously. It's based on where we think the market is going to grow and which product lines they're going to grow and what pace they're going to grow at. But in general, I think we feel like the capacity expansion we're doing right now will keep us well ahead of demand.

Got it. And then just one more. In proteins, how large is your growth factor business today? And how should we think about the growth in that business within proteins this year?

Yes, it's been traditionally about 1/3 of our proteins business, and it hasn't really changed that much. And we expect high single-digit to low double-digit growth for that business in the foreseeable future. Kind of matching up, Jacob, more with market growth.

Our next question today comes from Joe Munda of First Analysis.

Real quick, a lot of questions answered here. But one area of focus I wanted to touch on was gene therapy. You talked about new customers coming on, 50 significant customers where it stands today. First, can you define what is a significant customer, how big? And then can you talk a little bit about the growth, perhaps new versus existing? If you can give us some color there?

Yes. So in general, Joe, when we look at customers, our significant customers are the ones who are scaling, that are buying either one product line at a fairly significant amount or they have multiple products in our portfolio. We haven't given out exactly what that revenue is. But it's definitely meaningful and significant for Repligen. Obviously, when you look at our total revenue last year, 15% of revenue puts us at a little over $40 million. So you get a sense of what those 50 significant customers are contributing towards that $40 million. So we're excited about it. We think we have a really good base of customers in gene therapy. We're working with the right folks. We also believe that when we look at the landscape, we're about 20% penetrated in the market. So it also tells you a little bit about what the potential is in the future as more and more gene therapy companies start to move from preclinical to Phase I to Phase II. So we're in a good position. We've got good products, 20% penetrated, got over $40 million in sales last year coming from gene therapy customers and the right sort of mix of CDMOs and gene therapy developers.

Okay. And that's helpful. And then in China, I know a couple of questions have been touching on it. But I'm curious, the type of business that you're doing in China, is it all products across the board? Or is there a particular focus area, a particular business line that could be potentially impacted? Any clarity there would be great.

So we sell all our products. There isn't one in our portfolio that we don't sell into China. I think it's pretty clear. China is very similar to all of Asia, where our filtration portfolio has significantly more revenue than any of our other businesses. That said, I think the - our analytics business and C Tech is doing very well over there and continuing to bring customers on board. We've been pretty open that our prepacked comp business, while we have good business in China and Asia, that's probably been a little harder to get the traction that we've seen in North America and Europe and in Asia that - with the prepacked comp business. So it's mainly a filtration portfolio exposure.

And then my last question. Though you did talk about the long-term goal, and obviously, M&A is going to play a role there. I mean, to the degree you can talk about it, but the focus areas, particularly in M&A, know analytics has been a nice driver for you, especially this year. I mean, can you talk a little bit about assets in the space, availability of those assets? And just the multiples you're seeing as far as what it takes to potentially acquire assets in this space?

Yes. So 2020 is not that - is not much different than 2019 in terms of what assets are out there. I think anyone who plays in bioprocessing knows who the players are. It's all about forming relationships and going after the targets that we believe are the right targets for Repligen. So there's no one area of focus for us. We're clearly just started in analytics. So that's something over time that we will definitely build out. But obviously, we're not - we've not stopped looking in the filtration chromatography space. So all 3 areas for us are important. In terms of multiples, it just depends, right? So for small companies that are low in revenue, then it's probably - depending on the type of technology, if you've got technology innovation, then you're paying a high multiple. If it's a more of a me-too type product line, then the multiples are going to be much lower. So in general, the multiples have been in that 6 to 10x range for a good company with good margins and scaling. So that's - our expectation is that for the types of companies we're looking at, it's going to be in that range, 6 to 10x revenue.

And ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks.

Great. Just like to thank everybody for joining us today. Look forward to catching up with everybody in May, and we'll stop here. Thank you.

And thank you, sir. Today's conference has now concluded. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.