Repligen Corporation (RGEN) Q3 2021 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Repligen Corporation's Third Quarter of 2021 Earnings Conference Call. My name is Anthony, and I will be your coordinator. Please note that there will be a question-and-answer session following the Company's formal remarks. In order to accommodate all individuals who wish to ask a question, there will be a limit of two questions at a time. [Operator Instructions] I would now like to turn the call over to your host for today's call, Sondra Newman, Head of Investor Relations for Repligen.

Thank you, Anthony, and welcome to everybody listening in today. On this call, we'll cover business highlights and financial performance for the three and nine-month periods ended September 30, 2021. We'll also provide updates to our financial guidance for the year 2021. Repligen's President and CEO, Tony Hunt and our CFO, Jon Snodgres will deliver our report and then address questions. As a reminder, the forward-looking statements that we make during the call, including those regarding our business goals and expectations for the financial performance of the Company are subject to risks and uncertainties that may cause actual events or results to differ. Additional information concerning risks related to our business is included in our annual report on Form 10-K, our quarterly reports on Form 10-Q, the current report on Form 8-K, which we filed today and other filings that we make with the Securities and Exchange Commission. Today's comments reflect management's current views, which could change as a result of new information, future events or otherwise. The Company does not obligate or commit itself to update forward-looking statements, except as required by law. During this call, we 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 also 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 expense, including R&D and SG&A; operating income and operating margin; other income and expense; 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, 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, and welcome to our Q3 earnings call. As you saw in our press release this morning, we delivered another outstanding quarter and first nine months for the company. The effort from our global team has been exceptional as we have focused on building out our workforce and manufacturing capacity and on integrating our four acquisitions since Q3 of last year. In the third quarter, revenue from COVID customers increased to $48 million, up sequentially from $45 million in Q2. We also had stellar organic growth for our non-COVID-based business, which was up 49% organically in the quarter and 37% year-to-date as both mAb and gene therapy account revenue accelerated. Strategically, during the third quarter, we executed on a number of agreements that strengthened and expanded our Proteins franchise. First, we signed a new four-year Protein A ligands supply agreement with Cytiva, which extends out to 2025. Next, we developed and launched with Navigo and Purolite a new Protein A ligands that is unique in the marketplace and falls for aggregation challenges associated with pH sensitive antibodies. And finally, we acquired Avitide, a leading player in affinity ligand discovery and development, which builds off and complements the strategic partnership we have with Navigo. In terms of overall revenue, we delivered 89% growth in the quarter, including 77% organic growth to reach $178 million, driven by strength in the base business where gene therapy growth was a standout and from COVID programs. Our base business accounted for 67% of revenue and 42 points of our growth with all four franchises delivering exceptional performance in the quarter and through the first nine months of 2021. As noted above, within our base business, gene therapy revenues were up over 50% where our filtration franchise continues to see strong adoption of viral vector accounts. In addition, our gene therapy customer base continues to expand, which we see as a positive leading indicator for future growth. 16 new gene therapy accounts were added in the quarter and more than 50 have been added year-to-date. Based on these results, we now expect full-year gene therapy revenue growth in the range of 30% to 40%, representing a 11% to 12% of our overall revenue. COVID programs represented 27% of our overall revenue and 36 points of a total growth in the third quarter. COVID demand has been very consistent here in the second half of 2021, and we expect Q4 revenues for COVID to be very much in line with Q3. Finally, acquisitions made in 2020 and in 2021, represented over 7%, both third quarter and year-to-date revenue all are tracking at or above our expectations, and we continue to make significant operational investments to increase overall capacity as we head into 2022. On the orders front, we continue to see strong momentum with orders up approximately 130% through the first nine months of this year. In the quarter, COVID orders represented over 40% of the order book as a number of our large COVID customers place significant orders for next year. Our COVID order book for 2022 is now over $150 million and we are very much in line with our expectations that COVID accounts will contribute at least $200 million in revenues for the company next year. Our base business orders were again very robust with strength in ATF, ARTeSYN systems, hollow fibers and OPUS pre-packed columns. Given the strength in orders and overall revenue performance, we now expect 2021 to finish between $655 million and $665 million with COVID revenue in the range of $175 million to $180 million. Our base business growth should be in the range of 37% to 39%, reflecting the strong adoption of our core technologies in bioprocessing. Before jumping into our quarterly results, I want to provide some commentary on our capacity expansion programs and our most recent acquisition of Avitide, which closed on September 20. So let's start with capacity. During Q3, we made significant progress building out additional capacity for the company. In France, Polymem is now fully online producing and shipping hollow fiber membranes, supporting our bioprocessing customers with the first modules shipped in late Q3. We expect to continue to ramp up capacity at our Toulouse site over the coming months as more customers qualify in the products. In the Netherlands, our OPUS Breda facility came online in Q3 and the first OPUS Columns were delivered to European customers in September again, putting us in a very good position for 2022, where EU customers will be able to drop ship resins to our Breda facility for column packing. Through the end of Q3, over 34 European customers have formally approved and accepted our Breda facility for the manufacturing of pre-packed columns. Finally, over the coming two quarters, we expect to add significant capacity in our Rancho Dominguez, California and Marlborough, Mass sites to support our filtration franchises. Moving now to the acquisition of Avitide, an expert in affinity ligand discovery and development. This is a very important acquisition for us as it one strengthens both our Proteins and Chromatography businesses and strategically moves Repligen into affinity resin solutions for gene therapy, where we can leverage our commercial organization. And two, it builds off the excellent partnership we've established with Navigo GmbH and expands our ligand discovery and development engine. Our goal over the coming months is to focus on launching differentiated new products into gene therapy viral vector space and building out our portfolio of affinity resin so we can compete more effectively in the rapidly emerging applications within bioprocessing. So moving now to our quarterly performance. The story of the quarter was the 49% non-COVID-based business growth and the continued strength that COVID accounts, which were up 247% year-over-year. Order load as noted earlier was exceptionally strong with our non-COVID accounts outpacing COVID demand. In filtration, our business again, more than doubled in Q3 compared to the third quarter of 2020. The strength in filtration was broad-based. Our ATF business is beginning to make some real inroads into gene therapy accounts, where Lentivirus and AAV customers are seeing the benefits of increased yield. Our Cross-Flow Hollow Fiber and TangenX Flat Sheet Cassette businesses more than doubled in the quarter as we continue to see robust demand to support COVID vaccines along with accelerated adoption for non-COVID applications. We are especially happy with our new customer progress. For example, in our Flat Sheet Cassette business, we added 36 customers with approximately one third of them coming from gene therapy. Finally, our systems business continues to perform well with strong market demand for our benchtop and process scale products. It was an important quarter for us as we launched a series of fully automated single-use system supporting our TangenX Flat Sheet Cassette franchise and a series of new ARTeSYN chromatography systems, which we expect to be drivers of growth for us in 2022. Based on strong Q3 performance, we now expect our filtration business to grow at 125% here in 2021. Moving to chromatography. Our OPUS pre-packed column business had an excellent quarter driven by gene therapy and COVID customers. We saw a nice uptick in demand through the first nine months for our OPUS 80 columns as customers continue to implement our technology and late stage processes. We continue to transition customers to customer supply resins, and now almost 70% of OPUS revenues are coming from columns. This will improve again in 2022 as our Breda facility is now online. And as mentioned earlier, customers have qualified and accepted shipments from this facility. For the year, we anticipate the chromatography franchise will grow in the range of 40% to 45%. Our Proteins business had another outstanding quarter with strength across the Board in ligands and growth factors. We are pleased to have secured the long-term contract with Cytiva on Protein A ligands, and we look forward to the market impact of our Protein A high pH resins developed with Navigo and new products to be developed and launched by Avitide. We now expect proteins to grow 40% to 45% here in 2021. Finally, our process analytics business continues to accelerate as customers adopt SoloVPE and FlowVPX. For the quarter, the business was up approximately 31% with new accounts again, accounting for almost 50% of the systems sold. Within our analytics customer base, 60% of the growth is coming from the monoclonal antibody customers with an increasing contributions coming from new modalities and gene therapy [indiscernible]. We anticipate growth of approximately 35% for this business in 2021. So overall, we had another outstanding quarter in Q3 with exceptional strength in our non-COVID-based business and consistent demand from our COVID account base. With strong order growth and new products entering the market, we are confident about our finish in 2021 and continued growth in 2022. We look forward to updating you on our progress through the year. And with that, I will turn the call over to Jon for the financial update.

Thank you, Tony, and good day, everyone. Today, we are reporting our financial results for the third quarter 2021 as well as updating our financial guidance for the year. Unless otherwise mentioned, all financial measures discussed reflect adjusted non-GAAP measures. As shared in our press release this morning, we again delivered record revenue and strong earnings growth for the third quarter of 2021. We also continue to see robust order intake supporting our outlook for the remainder of 2021 and into 2022. As Tony highlighted, our base business continues to accelerate up 49% year-over-year and contributing 42 points to overall revenue growth of 89%. The strength of our base business, which excludes COVID-related revenue and inorganic acquisition revenue, was propelled by excellent performance in each of our four product franchises. Our COVID program business also continued to perform well adding 36 points to overall revenue growth in the third quarter. Finally, inorganic growth from our 2020 acquisitions of EMT, NMS and ARTeSYN, and our 2021 acquisitions of Polymem and Avitide drove 11 points of the 89% growth in the period. During the third quarter, in addition to completing our acquisitions of Polymem and Avitide, our operational focus continued on capacity expansion and integrating our 2020 acquisitions. We've also kicked off Phase 4 of our global SAP implementation project encompassing our NMS business, our Korean and Indian sales offices as well as our new Hopkinton startup facility. On the hiring front, we've continued to expand our manufacturing, R&D, commercial and operating infrastructure. Over the three quarters of 2021, we added approximately 500 individuals to our team, a 44% increase from year-end 2020. These investments are critical to supporting the rapid growth across all of our product lines as we focus on supporting our customers and driving down lead times for our products. Now shifting to our third quarter 2021 revenue commentary. On our topline, we generated record revenue of $178.2 million in the third quarter of 2021, representing reported growth of 89% and organic growth of 77%. As mentioned earlier, included in our reported growth figures is 11 points of inorganic revenue from 2020 and 2021 acquisitions plus approximately one point of tailwind from foreign exchange. Overall, our third quarter reported revenues include our base business, representing 67% of total revenue, COVID programs representing 27% and our inorganic acquisition revenue representing about 6%. In addition to our overall revenue strength in the quarter, we continue to see strong bookings in each of our product franchises with overall order expansion of greater than 130% through the first three quarters of 2021. As it relates to third quarter 2021 regional revenue growth for all of our direct products, positive traction continues in each of our three global regions. Revenues from Asia and the Rest of the World were up nearly 100%, Europe expanded a greater than 130% and our North American region sustained its strong performance with revenue growth of greater than 60%. Relating to our regional revenue distribution for our direct products in the third quarter of 2021, Asia represented 18%, Europe represented 37% and North America represented 45%. Now moving down our income statement. Third quarter of 2021 adjusted gross profit ramp to $103.8 million, an increase of $49.2 million or 90% compared to the third quarter of 2020. Adjusted gross margin finished the third quarter at 58.3% compared to 58% from the same period in 2020. The 30 basis point improvement reflects benefits from positive volume leverage, the majority of which was offset by investments in facilities, equipment depreciation and headcount tied to our capacity and infrastructure expansion initiatives. Next, we'll transition down the P&L to adjusted operating expenses. Adjusted research and development expenses increased to $8.8 million in the third quarter of 2021 compared to $4.4 million in the third quarter of 2020. So far this year, we have launched several innovative new products, most notably our XCell ATF lab-scale controller, FlowVPX technology, flat sheet filtration systems through spectrum, chromatography systems through ARTeSYN and our high pH affinity ligand. Our SG&A expenses for the third quarter of 2021 increased to $38.1 million or 21.4% of revenue compared to $23.3 million or 24.8% of revenue for the 2020 third quarter. The increased SG&A spend on a dollar basis was related to the timing of our 2020 and 2021 acquisitions plus continuing investments in personnel and facility expansion to support the significant growth we are seeing in our business. Now shifting to adjusted earnings and EPS. Adjusted operating income was $57 million in the third quarter of 2021 versus $26.9 million reported in the prior year third quarter, an increase of $30.1 million or 112%. Third quarter adjusted operating margin was 32%, an improvement of 340 basis points compared to 28.6% in the 2020 third quarter. Adjusted operating margin expansion in the third quarter of 2021 reflects the impact of strong volume leverage on our overall business. Third quarter 2021 adjusted net income was $44.7 million, an increase of $23.5 million or 111% compared to $21.2 million in the 2020 quarter. Adjusted EPS increased to $0.78 per fully diluted share in the third quarter of 2021 compared to $0.40 in the 2020 period, an increase of $0.38 or 97%. Our cash and cash equivalents, which are GAAP metrics totaled $621 million at September 30, 2021 and reflects the impacts on cash from our third quarter Polymem and Avitide acquisitions and related expenses. We'll now move to our 2021 full-year guidance. Our GAAP to non-GAAP reconciliations for our 2021 financial guidance are included in the reconciliation tables in today's earnings press release. As previously mentioned, unless otherwise noted, all 2021 financial guidance discussed will be non-GAAP. Please also keep in mind that our 2021 guidance maybe impacted by fluctuations in foreign exchange rates beyond our current projection of a 2% tailwind on full-year sales and does not include the potential impact of any future acquisitions that the company may pursue. Based on the continuation of strength in our robust bioprocessing market and the strong operational execution in our business and inclusive of the impacts of our Polymem and Avitide acquisitions, we are increasing our 2021 full-year revenue guidance, a GAAP metric by $25 million at midpoint up to $655 million to $665 million. This represents reported growth in the range of 79% to 82% and organic growth of 65% to 68%. We are maintaining our 2021 adjusted gross margin guidance at 59% to 60% consistent with our previous guidance. We are raising our adjusted operating income guidance by $11.5 million at midpoint to a range of $204 million to $208 million and increasing the lower end of our adjusted operating margin range by 100 basis points to the range of 30% to 31% of revenue for the year. With respect to adjusted other income and expense, we are increasing expense to $3 million from our prior guidance of $2 million mostly related to transactional foreign exchange exposure realized in the first three quarters of 2021. We continue to expect full-year 2021 adjusted income tax expense to be approximately 19% of adjusted pre-tax income. This guidance assumes an adjusted tax rate of 22% for the fourth quarter of 2021, and does not consider the potential impact of additional employee stock transactions, which we expect to be modest for the remainder of the year. We are raising our adjusted net income expectations for full-year 2021 by $8.5 million at midpoint to a range of $163 million to $166 million, and we are boosting our adjusted EPS expectation by $0.14 at midpoint to $2.86 to $2.91 per fully diluted share. Our adjusted EPS expense continues to reflect an estimated $57 million weighted average fully diluted shares outstanding for the year. Our full-year 2021 adjusted EBITDA range is being increased by $10.5 million at midpoint to the range of $221 million to $225 million with depreciation and intangible amortization expenses expected to be approximately $18 million and $22.2 million respectively. The company expects to invest $60 million into capital expenditures in 2021 consistent with our previous guidance. This includes key capacity expansion initiatives and continued information system investments. Inclusive of impacts of compensation paid for our third quarter Polymem and Avitide acquisitions, we expect year-end cash and cash equivalents, a GAAP metric to be in the range of $620 million to $630 million with our CapEx investments being fully funded by cash generation from our operations. This completes our financial report and guidance update. And I will now turn the call back to the operator to open the lines for questions.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Dan Arias with Stifel. You may go ahead.

Good morning, guys. Thanks for the questions. Tony, on gene therapy, 50% growth is pretty substantial acceleration. It sounds like new customers are a big part of the equation there, but can you just expand a little bit on the drivers there? And then obviously that space is working its way through safety questions that are sort of ongoing. Do you think that will be a meaningful part at all for demand or for spending patterns in the next couple of quarters or just in general?

Yes. I think gene therapy has really benefited from the fact that are – the commercial organization, the field applications teams have been really out with our customers for the last six to nine months. We're doing a lot more trials. We're able to get in and demonstrate the technologies that we have. I think we have a really good portfolio of products. I think it's all just adding up. I think second half of last year and first quarter or two of this year was probably a little lighter than we would've liked, but we can see the progress that we're making and that's really resulted in really nice Q3. I think a strong finish to the year and overall gene therapy, probably a little bit ahead of where we thought we would be at the beginning of the year.

Okay. And the second, I just ask you to just – yes, just the issues that are ongoing in the industry and you've got I'm sure a pretty unique view on – maybe not unique, but certainly an insightful view I assume on just what's going on there, how you see that affecting spending if at all over the next year or so?

Yes. I think the whole bioprocessing industry is in the same spot. You can see – I think each year we're making more progress or – the gene therapy industry is making more progress. There are a lot of clinical trials going on out there. The fact that we're adding 36 customers in – I think in the quarter just gives you a sense of the activity that's happening in the marketplace. So I don't think it's slowed down. Clearly, we need to see more drugs getting approved. I think as those approvals come through, I think that'll be a positive sort of tailwind for the industry. So we're not concerned. There's a lot of work to be done, a lot of activity out in the field with our commercial and field applications people, and we think it's a market that will continue to grow for us and for the bioprocessing industry in general for the foreseeable future.

Yes. Okay. And then maybe on the COVID-related revenues. I mean, it feels like you're on pace to have pretty much the entirety of the $200 million or so that you're looking at for next year booked by the end of the year. Can you just talk about capacity there for the next year and then how you see the order book shifting to 2023 as we look across the next couple of quarters?

I'm smiling because I was expecting the 2023 question, Dan, at the end of February or maybe even May of next year. But no look, clearly, we've over a $150 million. You're right. We’re tracking towards getting up to that $200 million mark by the end of this year. There was a significant amount of orders placed by some of our biggest customers in Q3. So when you look at the percent of our order book that came from COVID, it was probably higher than other quarters and that really reflects some of these big players coming in and placing orders for four quarters. Others have placed orders for the first half of the year and into Q3. So we expect that honestly by the time we hit the end of the year, most of the big players will have placed at least nine months if not 12 months of their orders. So in terms of capacity, we are working as hard as we can. I mean, it’s a huge effort by the operations team. We've done a phenomenal job of building out capacity over the last 12 months. We have another year of capacity build-out to go. You can see it in our CapEx spend. But I think we're staying ahead of the demand curve. We're really working to drive down lead times even further as we get into 2022 and into 2023. And I'm going to refrain from making any comments on 2023 until we finish 2021 and we talk about 2022 guidance, but we'll see what happens.

Our next question comes from Julia Qin with JPMorgan. You may go ahead.

Hi, good morning. Congrats on the quarter. I want to touch on the Avitide acquisition. Could you talk about specific timing of that AAV resin commercial launch? I think in the press release you just said 2021, 2022. So wondering if you can be more specific regarding the timing. And is that benefit of the new launch included in that $10 million revenue guidance that you issued for 2022? And then as we think about the revenue synergy from that proprietary AAV resin content, like what does that – what kind of synergy should we be thinking about in the form of incremental OPUS column sales going forward?

Okay. Thanks, Julia. I think in terms of Avitide and the launch of the products, they've already – the majority of the work done on a number of those products and resins, so we expect that. Really first quarter of next year, the products will get launched. So that's really the timing. We might be able to get early access for customers here in Q4. But I think in terms of launching products, it'll be Q1. It's definitely in the $10 million revenue guidance for next year. And our plan, of course, would be to really package the AAV resins into different form of OPUS columns. And again, it's not a huge revenue synergy. I think it's more a convenience for customers. It makes it easier for customers to evaluate. It makes it easier for customers to implement. And we think we're just really leveraging the tools that we have to simplify the manufacturing process for customers, but not – it's not a massive amount of revenue that will come from the OPUS columns, but I think the convenience factor is actually significant.

Got it. That's helpful. And then as we think about the broader, the chromatography content ownership strategy, help us think about how does that kind of expand your share of the chromatography TAM, which you previously pinned for $185 million. I mean, of the total value of chromatography, could you give us a sense of like how much it's column versus resin content that you can now capture with this acquisition? And is there like a long-term content attach rate that you are aiming now we should be thinking about?

Yes. So our TAM for the most part in chromatography is really around the pre-packed columns piece. We have a very, very small resin business, and we have not gone out and said, hey, in the multi-billion dollar chromatography resin market that – that's where we play today. But when we start to launch products over the next, say one to two years, whether it's into gene therapy or it's into other application areas, we're definitely going to tap into that multi-billion dollar chromatography market, so that's our intent. If you think about our Proteins business, which is the ligands business and obviously growth factor as well, but the ligands part of the Proteins business and the chromatography, they're very related. So our Protein A strategy is really a ligand strategy and we have three players, right, that we work very closely with Cytiva, Millipore and Purolite, and a lot of the content that we're generating right now, that's highly differentiated content is coming through the collaboration and partnership we have with Navigo. We expect that Avitide is going to become not only a content provider for us, but as we launched new products like resins, we will sell those resins through our commercial organization, but they will be in non-Protein A based affinity application. So that's the strategy. And yes, I think we will be opening up a bigger market for Repligen and therefore the TAM and chromatography will increase.

Got it. And just to confirm on your last point, it sounds like there's really no overlap with your existing relationship with Cytiva or Purolite or other resin. Was it resin partners, right?

No. I mean, look our interaction relationships with Cytiva, Millipore and obviously the relationship we have with Purolite is an exclusive relationship around Protein A that – with respect to the ligands that we would generate and make. There really isn't a whole lot of overlap. So this play on Avitide is not about Protein A, it's about other affinity opportunities that we see in the marketplace and we would like to be one of the players.

That's great. Thank you.

Our next question comes from Puneet Souda with SVB Leerink. You may now go ahead.

Yes. Hi, Tony. Thanks for the question. So first one is just clarification on the – so the COVID guide at least $200 million for next year, just wanted to understand in terms of the commercial vaccine component of that versus vaccines that were potentially in Phase II and III versus therapeutics as a sort of component of that, do you expect it to be largely commercial vaccines at this point?

Yes, we do. The majority of it would be commercial vaccines. Obviously, we have some sense of where other players who are either late stage or on the therapeutic side, what they're forecasting. But I think the majority would be coming from commercial.

Got it. Okay. And then a question on the lead times and supply chains. Obviously, we are hearing supply chains concerns across the – obviously more in the electronics components and things like that, some in reagents as well. And there being questions obviously around inflations across multiple sectors. So just wanted to get a sense from you, what are you seeing in terms of – first of all, lead times from suppliers to you as well as your current lead times, how they've improved? I know you commented in COVID obviously that impacted quite a bit, but it's been improving since then. And then overall, if you could just give us a view of the supply chain overall for sort of product manufacturing and any cost increases that you can potentially pass on to the customers?

Yes. So let's start on the lead times. So clearly, our strategy is no different than the strategy of any other bioprocessing player. We're all investing. Major investments in CapEx, major investment in people. We're all adding equipment. We're bringing and putting new buildings online or in line. So everybody is doing the same thing, everybody is at different phases and stages of that build-out. We're in a good position in terms of what we said we were going to do at the beginning of the year. We're executing on that. I think the Polymem acquisition has really helped us in terms of really accelerating where we wanted to be with the hollow fiber portfolio. That was very important to us. The other capital projects that we're working on that's being driven by our operations team is right on track. Big one for us next year is to bring on the Marlborough facility, which is 67,000 square feet. Also, obviously we're building out again in Rancho. So those two are really important. You saw what we've done with OPUS again, that will help our European customers in terms of lead times because we don't have to do the cross the ocean shipment of resins. So again, I think we're making steady progress, good progress and I expect 2022, our lead times will continue to come down across our whole portfolio. In terms of lead times from suppliers, I don't think we're doing anything different than anyone else. We're all trying to get the right amount of raw materials on hand, so we can make our products and ship to customers on time. There's always spots in the supply chain where you have challenges on a monthly, quarterly basis, but it's no different in Q3 or Q4 than it was in Q1 and Q2. So we're working through that. In terms of inflation, we definitely see in terms of pricing, but expect to see that raw materials have gone up. We know wage increases have gone up as well. So there's definitely a little bit of that going on. And then we'll look to see, when we get into next year, what our pricing strategy is going to be for our products, but we haven't made final decisions on that yet.

Got it.

I think we do have some protection from certain suppliers that we have under three and five-year contracts, so we do have pricing protection on those. But a lot of the supply houses, probably the resin providers will be pushing up pricing. So as Tony said, we'll be looking at that here over the next couple of months to see how we respond to that.

Okay. Super helpful. And then Tony, the last one, just more broad question on PAT. When we look at CTech, how it's performing and with FlowVPE, FlowVPX in the market overall, what are you seeing in terms of the recognition of – among the customers as to the significance of these technologies, the PATs overall and appreciation and sort of the penetration? Where do we stand with – overall with the PATs and CTech type of technologies broadly speaking, and where do you think we could be in the next few years?

Yes. I would say, PAT for the more complex readouts that customers are looking for is really in the early innings. I think that a lot of companies are doing offline, at-line. There's very few that have really implemented inline. I think the real advantage of a product like FlowVPX is that you can monitor your drug concentration inline. I think I said at the last earnings call that at the end of 2020, I think we had one customer who is really pushing forward with the clinical implementation. I think over a quarter ago, first half of this year, I think we had 19, 20 customers that were thinking through and working on implementing in a clinical setting. So I think that sort of gives you an idea of the ramp. I do think that last year with the restrictions on getting people into sites to do evaluations slow this down a little bit, that's ramped up here in 2021. We're very bullish on the technology. We think it's highly differentiating and it's a real value driver for our customers. And I think PAT in general in the industry for quite a while, 2000 was the year of PAT was – there was big push, didn't really happen. So 21 years later, I think we're finally seeing PAT getting implemented, and it's really needed in the industry. And I think you're going to see plenty of implementation and other products that will come through that customers want to implement to do inline monitoring.

Okay. That's great. Very interesting. All right. Thank you.

Our next question comes from Jacob Johnson with Stephens. You may now go ahead.

Hey. Good morning, everybody. Maybe Tony, just first on Proteins, as you highlighted you renewed the Cytiva agreement. You've got the Navigo, Purolite partnership, and now you have Avitide. How should we think about the long-term growth rate for the Proteins franchise going forward? Is it maybe more in line with the kind of 15% to 20% growth you target overall?

Yes. It’s a great question, Jacob. I think the challenge in terms of giving you a long-term growth on this really depends a little bit on where Cytiva goes in the next few years. Obviously, the new contract, as we have mentioned before was driven by minimums, not by percent of total markets. So as Cytiva gives us their forecasts for 2022 and then – someone could stop typing, it would be really good. So Cytiva in 2022 and then where that goes in 2023 and 2024, we'll get a little bit more insight into it. To balance that off, we're really happy with the way our growth factor business is going. So that's a double-digit growth driver for us. We're really happy with the progress we've made with NGL-Impact A and the commercialization and the work that Purolite has done. So that's been a real good driver for us. We really like the new resin or ligand that we've launched that Purolite’s put on to their base speed, which is the high pH, I think is very unique in the marketplace. And then Avitide starts to come in next year with new products. So I think it's really around where we are at the end of 2022 with new products and the success of those new products that will drive growth for proteins in 2023 and 2024.

Got it. Thanks, Tony. Sorry about the typing in the AirPods [indiscernible].

Sorry about that.

Yes, no, all good. I deserve that. There's been a lot of talk from investors. I think you all recently about kind of your clinical commercial mix and the opportunity there. I guess just one question about that is, is how does that mix vary across your segments? And as we look out the next couple years, what segments or product lines maybe you could see the largest shift towards commercial mix looking ahead?

Yes. We've had this conversation I think with the number of investors over the last, say three to six months. We really need to go back and rerun our clinical commercial split at the end of this year. Obviously, COVID changes that split in a big way. So we'll probably run it for non-COVID and COVID. I would say that almost every product that we have in our portfolio, when you look at our filtration products, they all started off in the early clinical phases. If you look at the acquisitions that we did, very few of them had commercial implementations for drugs, when the acquisitions were done so – but they had nice pipelines. And so we've been building the pipeline up. So we're definitely more – those businesses are more dominated by clinical, but we have seen over the last two plus years a lot more commercial successes. So we'll run the numbers at the end of this year. We'll probably – when we get into that February timeframe, we'll be able to add a little bit more color on what the split is and how fast we think the ramp goes from clinical to commercial.

Got it. Thanks for taking the question, Tony.

No problem. Thanks, Jacob.

Our next question comes from Paul Knight with KeyBanc. You may now go ahead.

Hey, Tony. When I see some competitors offer like super fast turnaround times in hollow fiber, are you meeting that turnaround time? And the other question is if you meet a customer's demand because there maybe a shortage in the product, are you specked into that customer chain for, let's call it, a long time? So in this supply short market, are there shared gain possibilities with you or with some of these others like [indiscernible] that are promising quick turnaround time?

Yes. I think its all relative, Paul. I think if you compare Cytiva or a Thermo or a Sartorius to us, obviously we're a smaller, so the volumes we have to make are smaller than some of our competitors. I think everybody has products in their portfolio where they have great lead times and they have other products where they would prefer to have shorter lead time, but everybody is working to reduce the lead time piece. There definitely are opportunities for share gain. I think everybody is focused on that as well. So where you have a best-in-class lead times, you can definitely push and get customers to switch across to a Repligen product, or if you're Sartorius to Sartorius product, or if you're Cytiva to Cytiva product. But for us, we're very focused on driving our lead times down. We definitely have picked up some share gain this year and some – with some of our product lines. And that would be our goal as we go through 2022 as well.

Are you now at a point with your product lineup where you're with offering a comprehensive set of products, are you able to gain more customers with what is now a broader line of offerings?

Yes. I think we are. I mean, look at like everything else, as I said to the last question, it is somewhat relative. If you remember when we were all chatting back in 2015, when I took over as CEO, we had two products that we could talk three products. We'd talk about OPUS, talk about ATF and we talk about Protein A, like on the same growth factors. We clearly have a much broader, deeper portfolio now. You can start to connect the dots between unit operations, which makes it really good for us. We've been able to attract a lot more talent into the company because we have this broader portfolio. And I think the outcome of COVID kind of validates that the technologies that we've invested in either through our own R&D or through M&A has resulted in our ability to jump on to waves of opportunities that come through. And I would say gene therapy, which I think has been a nice win for Repligen with the products that we have. And definitely COVID, I mean, we've picked up 27% of our revenues coming from COVID. So I think it shows that people value what we do. We have differentiated technology and therefore we can jump on to new opportunities in the market and win our fair share.

Thank you.

Our next question comes from Christine Rains with William Blair. You may now go ahead.

Hi. Good morning, and congrats again on the great quarter. My first question is really centered around Polymem. I know you've previously mentioned that there's a lot of interesting innovation there. I was just hoping you could expand on this opportunity and maybe give some color on timing.

Yes. So when you look at – Christine, when you look at Polymem, I think they bring a number of advantages to Repligen. Obviously, the first one, we've been working with them for well over a year. And so our ability to scale, expand our hollow fiber business, they've done a phenomenal job of working with us. And as I said in my prepared remarks that we're shipping product from Polymem since Q3. So that's going to ramp up. That's great. There is also a company that have been around for over 20 years and they have developed a lot of technology that we think have applications in bioprocessing. So I'm not going to go through the details of those, but expect that the core competency of Polymem in hollow fiber membranes and modules is an asset to Repligen and we will be able to make better products faster because we own Polymem versus going out alone.

Great. That's really helpful. And then the second question I have is more of a big picture question. So just your latest thoughts on longer term bioprocessing industry ex-COVID and how you see that growing?

Yes. So I've been in bioprocessing for over 20 years and it's an industry in a market that has consistently delivered, I would say prior to COVID somewhere between 8% and 15% growth on an annual basis. I don't expect that that will change, right. I think we're going to – as we all work through COVID, whether COVID is two years, three years, four years, whatever it is, we're still going to see core growth in the non-COVID part of the marketplace. And you can see from all the players over the last week or so, they're all citing really great on COVID-based business growth. I still expect for Repligen 15% to 20% type growth for the non-COVID part of our portfolio. And in some years, that's 25%, 30%, other years it's going to be at the low-end of that range, but we definitely believe that bioprocessing is a healthy, healthy market for us to be in. And we don't see anything to suggest that that market will slowdown in a post-COVID world for the non-COVID part of the market.

Great. Thanks for the color there.

Our next question comes from Matt Hewitt with Craig-Hallum Capital Group. You may now go ahead.

Thank you for taking the questions and as others have said, congratulations on the strong quarter. Maybe just a couple for me. First off, originally, the guidance did not include any revenue synergies related to the ARTeSYN acquisition. Now that we're getting closer to the end of the year, are you starting to see some pull through from that? Or is that something you expect next year?

Yes. On ARTeSYN, obviously there's so much that is interwoven with the businesses that we have right now. So if you think about the acquisition, we did a VMT last year, that is a critical part of making the single-use flow paths that drive the success of ARTeSYN Systems. I think most of the synergies mattered really going to be next year because we're right now beginning to develop and launch the chromatography skids and the filtration skids. Prior to Repligen acquiring ARTeSYN, ARTeSYN was more of a custom skid shop, right, and now we have made it into more of a standard format that's configurable, that gives customers definitely a lot of flexibility, but kind of builds off a base model. So those products are starting to come through. As I talked about in my prepared remarks and chromatography, we'll be doing the same thing on the TFF filtration side next year and that's where most of the synergies will be coming from because that's not just up really nicely with our flat sheet cassettes matches up with our OPUS columns, it'll match up with our Avitide resins and OPUS columns. All of those things begin to play a role in terms of synergies, but we're right on track this year to what we said we would do with ARTeSYN for revenue in 2021.

That's very helpful. Thank you. And then maybe one last one, and you touched on this a little bit earlier in your prepared remarks, but I think you said you've added approximately 500 employees this year, obviously some of those coming through acquisitions, but you're clearly having success on finding talent. And I'm curious, as you look at the current situation, I've had a number of companies already talking about some of the challenges that they're having either finding qualified or quality candidates or they're seeing turnover. So it's more backfilling some losses. If you could talk a little bit about the hiring environment and where you sitting, maybe your expectations as we look out to next year? Thank you.

Yes. I think its all relative, Matt. I mean, if you look at what we're trying to hire versus some of the bigger players in our industry, obviously we're a percent, not a percent, but percentages of what other people are doing. So we're all in the same boat. Everybody is trying to hire talent. There's nothing magic about what we're doing versus what any of the other players are doing. We're all trying to get the right talent into the company. A lot of what we’re looking for, honestly in those 500 heads, which, obviously as you said, include M&A, but a lot of it is the hourly workforce. So just really building out our factories with the right number of people, the right shifts schedule, that's a big part of what we've been doing.

Understood. Great. Thank you.

Our next question comes from Ram Selvaraju with H.C. Wainwright. You may now go ahead.

Thanks so much. Can you hear me?

Yes, we can. Hi, Ram.

And congrats, of course, on a very impressive quarter. So firstly, with respect to gene therapy following on from I think some of your earlier discussion, I was wondering if you could elaborate on whether you see a particular category of gene therapy medicines contributing in an outsized or a significant manner relative to the other classes of gene therapies as you look at potential growth in this business growth opportunities for Repligen going forward?

Yes. I would say that, Ram, when we look at gene therapy, I think you'd look at the broad base of customers that we're dealing with. We are working with every CDMO. We're working with all the gene therapy companies that are doing their own manufacturing. Our focus has really been on the viral vector side. So AAV, lenti obviously, plasmids, obviously the industry is maturing slowly. So to call out a medicine right now and say that we think this is the best bet, we're not in a position to do that. We're really around serving that manufacturing arm and making sure that our products can give those customers increased yield for example, that's one of the biggest things that we do, especially in the viral vector space. So that's kind of where we're at. We don't really comment nor do I – am I an expert to comment on which medicines do we think will be drivers of future growth. So I'll leave it at that.

Do you think that in addition to the viral vector segment that there is potential opportunity for Repligen in the context of gene therapy that maybe being developed with respect to sort of things like ex-vivo cell therapy, so kind of the interface between cell and gene?

Yes. We honestly focused a lot of our time in that area. So we would have to see exactly what those customers are trying to do, and if they need filtration products or need chromatography products, I think obviously we can play in that space, but I think our focus honestly has been viral vector and plasmids for the most part.

Okay. And then just secondly, with respect to COVID-19, I was wondering if you could comment on what the market dynamics implications of this significantly lower vaccination rate level in emerging countries might have for Repligen's expectations going forward not just with respect to 2022, but beyond because it looks like given the significant degree to which some of these emerging regions have been lagging developed countries with respect to vaccination rates, there's still significant volume growth left to come with respect to commercial vaccine sales. So I was just wondering if you could comment on that, what implications that may have for Repligen's COVID business? Thanks.

Yes. I would say, Ram, everybody – we all read the same press, we all see the same reports, the way we view COVID vaccine demand is we're here to manufacture the volumes that our customers want us to do. So we're working with a handful of people who were making commercial vaccines. They're worried about how are they going to increase the penetration rate in some of the emerging countries that have high unvaccinated rates. So look, we react more to the volume and the need, and if that increases, that's great, that's great for Repligen, that's great for our industry. But I think it's – we are already – as I said earlier, we're already seeing orders placed out nine months to 12 months into next year. You got to believe that those companies are targeting exactly what you just spoke about and probably included in their demand profile. And of course that can change. You can have a new variant that comes through, and you could have – the booster shots coming through, but I would say that we react to the conversations we're having with our customers and hitting the demand profiles that they're asking us to hit.

Thank you very much.

No problem.

[Operator Instructions] Our next question comes from Hugo Solvet with Exane BNP Paribas. You may now go ahead.

Hi. Thanks for taking the question and congrats on the print. Three on my side, maybe one on the Millipore agreement for growth sectors. Can you maybe discuss or give us a bit of indications or you're preparing to take over commercialization here and the potential upside for you guys as you will potentially be able to go and see new clients. And two quick follow-up on the margins. Your margin has historically been lower in Q4. But the full-year 2021 guide that you updated, it plays a significant step down for the margins in Q4 for about 500 basis points. So just wondering, are there specific drivers here that we should have in mind given the margin strengths since the beginning of the year, and just taking a chance on 2022 question, some competitors that are expecting the margins to keep up at seminars level to 2021 given the COVID strengths, acceleration of underlying market growth and increased capacity and leverage. Are you guys thinking about the margin heading into the next year? Thank you.

Yes. Thanks, Hugo. On the Millipore side, some MilliporeSigma really the relationship we really started with Sigma, which takes back to 2010. So we did make the decision last year that we were going to transition to bringing the growth factor business in-house and that's happened. Really we've worked very closely with MilliporeSigma to transition customers across by the middle of this year pretty much all the customers have transitioned over to getting growth factor supply through Repligen. So nothing beyond that, obviously we know the customers, we interact with them on multiple fronts. And it's just a little bit more of controlling our own destiny on a product line like growth factor. So I think that's a positive for us. I'll let Jon talk through the margins in Q4, but I would say for 2022, we'll talk about where we think margins are going to be in 2022 when we hit the February timeframe, but I'll hand it over to Jon talk through the Q4 margin.

Yes. So we can start with the gross margin levels, we came in the quarter to around 58.3%, and we had guided the second half of the year to be right in that range. So I think we're pretty close to what we expected. On the operating margin perspective, we came in a little bit harder than we had originally planned to. And that's simply because we – our pace of hiring and filling roles in various commercial R&D and other infrastructure areas is a bit slower then we had put in our forecast. So as we roll into Q4, we're expecting to fill a number of those jobs. We have a number of those positions filled, and yet to start, people have made commitments to us and that's really driving the guidance reduction in the overall operating margin for the fourth quarter. And if you look at that and in relation to 2022, obviously that puts us at a lower starting point for 2022 then what you're going to see for full-year 2021. We'll be factoring that into our guidance when we talked to you guys in February coming up. But I'd say that probably a theme that we want to put out there right now is that we really don't expect to see operating margin or even gross margin expansion in the 2022 periods. So I would expect that to be not an increase as you guys start to model 2022.

Thank you very much.

This concludes our question-and-answer session. I'd like to turn the conference back over to Tony Hunt for any closing remarks.

Great. Just like to thank everybody for joining us today. We look forward to catching up with everybody in February. And thanks, again.

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