Repligen Corp (RGEN) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Repligen Corporation's second-quarter 2015 earnings conference call. My name is Karen and I will be your coordinator for today. This conference is being recorded. (Operator Instructions)

I would now like to turn the call over to your host for today's call, Sondra Newman, Senior Director of Investor Relations for Repligen.

Thank you and good morning. The purpose of today's call is to discuss our second quarter of 2015 results, to review our financial guidance for the year, and to discuss recent business highlights. Joining me today are Tony Hunt, our President and CEO, and Jon Snodgres, our CFO.

At the outset I'd like to state that this discussion may contain forward-looking statements. These statements are subject to risks and uncertainties that may cause our plans to change or results to vary. In particular, unforeseen events outside of our control may adversely impact future results.

Additional information concerning these factors is discussed in our annual report on Form 10-K, the current report on Form 8-K which we filed this morning, and other filings that we make with the SEC. The forward-looking statements in this discussion reflect management's current views, and they may become obsolete as a result of new information, future events, or otherwise. We may not update such forward-looking statements except as required by law.

Now I'll turn the call over to Jon for a financial review.

Thank you, Sondra. Good morning. Today we reported our financial results for the second quarter of 2015.

Product revenue reached $21.5 million, an increase of 38% compared to the second quarter of 2014, despite a headwind of 11% from foreign-currency fluctuations. Year-to-date we reported product revenue of $42.3 million, an increase of 41% from the same period in 2014.

As a reminder, all revenues for the first six months of 2015 were derived from bioprocessing product sales. During the 2014 year-to-date period, we received an additional $2 million of nonproduct revenue from BioMarin under the terms of our therapeutic outlicensing agreement.

For the second quarter of 2015, product gross profit was $12.9 million, compared with $8.9 million for the second quarter of 2014. Year-to-date, we reported $25.6 million of product gross profit, compared to $16.9 million in 2014.

Our product gross margin for the second quarter of 2015 was 60% of revenue, compared to 57.1% for the second quarter of 2014. Year-to-date our product gross margin was 60.6%, compared to 56.5% for the first half of 2014. The higher margins achieved in 2015 are the result of higher overall sales, resulting in strong volume leverage in our factories, as well as favorable product mix.

Research and development expenses of $1.3 million for the second quarter of 2015 were 12% lower than the second quarter of 2014. For year-to-date 2015, R&D expense totaled $2.8 million, an increase of approximately $200,000 over the first half of 2014.

SG&A expenses of $6.2 million during the second quarter of 2015 were $1.9 million higher than the same period in 2014, reflecting investments in staffing, systems, and facilities to support our current and future growth. For the first half of 2015, SG&A expense was $12.3 million, an increase of $4.6 million compared to the first half of 2014.

Operating expenses for the second quarter of 2015 included $800,000 of contingent consideration expense related to continued strength in sales of ATF Systems, which we acquired from Refine Technology, LLC, in June of 2014. Year-to-date we have recorded $1.9 million of ATF-related contingent consideration expense, which did not exist in the first half of 2014. We recorded these expenses due to a high probability that we will achieve the 2015 revenue milestones set forth in our asset purchase agreement with Refine.

Operating income for the second quarter of 2015 increased to $4.6 million, compared to $3.1 million in the same period in 2014. For the first half of 2015, operating income increased to $8.6 million, compared to $8.4 million for the first half of 2014. Recall that year-to-date in 2015 operating income was impacted by the $1.9 million contingent consideration expense, while the first half of 2014 benefited from $2 million of outlicensing income from BioMarin.

These factors also affect our net income, which was $3.6 million for the second quarter of 2015, compared to $2.8 million in the second quarter of 2014. Year-to-date net income was $6.5 million compared to $7.1 million for the first half of 2014.

Lastly, EBITDA for the second quarter of 2015 increased to $5.5 million, compared to $4.1 million in the prior year. For the first half of 2015, EBITDA increased to $10.8 million, compared to $10.3 million for the first half of 2014.

Please note that EBITDA is a non-GAAP financial measure and should not be viewed as an alternative to GAAP measures of performance. We are providing EBITDA based on our belief that this measure better enables investors to benchmark the Company's results versus historical performance and the performance of peers.

Today we are revising our financial guidance for the year 2015. We are raising our total revenue guidance to $78 million to $82 million, an increase from our previous guidance of $75 million to $78 million. Our revenue projection for 2015 is comprised exclusively of bioprocessing product sales and now reflects 29% to 36% sales growth.

We expect organic product sales growth in the same range of 29% to 36%. This includes an expected foreign-exchange headwind of 8% that we expect will be offset by 12 months of ATF sales in 2015, versus seven months of sales in 2014.

Our guidance for product gross margin remains unchanged at 56% to 58%. And we continue to expect gross profit to be largely hedged from foreign-exchange exposure, as we have a significant percentage of our manufacturing costs denominated in Swedish krona.

Operating expenses for 2015 are expected to be $65 million to $67 million, an increase of $3 million from prior guidance. This includes our expectations for SG&A expenses of $22 million to $24 million; R&D expenses of $6 million to $7 million; and contingent consideration of approximately $1.9 million, which we have fully recorded as of the second quarter.

We are retaining our operating income guidance of $14 million to $16 million and our net income guidance of $10 million to $12 million for the year 2015. Our 2015 guidance could be impacted by fluctuations in foreign exchange rates beyond the expected FX headwind of 8% and does not include the impact of potential milestone payments from BioMarin or potential acquisitions.

I will now turn the call over to Tony to comment on business highlights for the second quarter.

Hey, thank you, Jon. As you can see from our results today, we had another record quarter for our bioprocessing business. Revenue grew 38% to $21.5 million, and our continued focus on operations resulted in gross margin expansion of 290 basis points for the quarter and 410 basis points for the first half of 2015.

Clearly we are very pleased with the way the quarter played out. The momentum we saw in Q1, with strong Protein A sales from both legacy and new ligands, carried forward into Q2. Both our affinity ligands and ATF businesses were the major drivers of growth here in the second quarter.

We finished the first half of 2015 well ahead of our expectations. And as we look to the second half of the year, we expect to see continued strength for our products, where we have technology and market leadership.

Drilling down some more on the performance of our products and the trends we are seeing in our end markets, for the last few quarters we have highlighted the momentum we are seeing in the ATF business. As reported in Q1, we continue to see customers adopting the technology in perfusion and concentrated fed-batch cell culture applications. In addition, ATF Systems are being evaluated in the emerging opportunity around seed train optimization as part of the efforts to implement process improvements even earlier in upstream manufacturing.

The combination of direct sales and regional distributors is working well for us, and we are winning new accounts especially in Europe and Asia. The growth we are seeing in ATF is coming from a combination of these new customers and multisite adoption by existing customers, with business in Asia accelerating rapidly. In addition, as customers scale up we are seeing more multiunit orders coming through, and we expect the second half of 2015 to be very strong for ATF as we capitalize on these opportunities.

Before moving to our downstream portfolio I want to circle back on the cell culture media applications. We are seeing increased interest from our customer base on applications of ATF in perfusion and fed-batch processes, and we expect this industry trend will positively impact our growth factor business, where our partner Sigma-Aldrich has recently launched a new cell culture media incorporating our growth factors.

In our chromatography products group, our OPUS columns continue to gain traction and market share. With the launch of the larger OPUS 45-centimeter and 60-centimeter columns, and because of our unique flexibility in packing any resin to any bed height, we have created clear and meaningful differentiation between us and our competitors in this space. More importantly, we are offering customers real options now to replace their glass columns with prepacked OPUS columns. The contract manufacturing organizations continue to adopt this technology, and our commercial organization has done a great job converting over key players in our industry to OPUS.

OPUS 60 is off to a good start, with positive feedback and a healthy pipeline of opportunities for us to execute on in second half of this year. Similar to my comments about ATF, we are seeing an increase in the number of multicolumn orders, as customers platform OPUS in their manufacturing processes. We expect a strong second half for OPUS as our expanded commercial organization closes out new opportunities and our markets expand outside the US.

To give a good example of the interest in the market for our products, we recently hosted two seminars in London and in Boston. We had actually over 170 customers attend the events, with 14 customer presentations on trends in upstream and downstream bioprocessing, including the implementation of our technologies in manufacturing. I attended the Boston event, and it was really encouraging to hear our customers speak about the importance of our products, service, and support as they adopt new technologies in their manufacturing process.

Turning now to our new product development programs, we are already seeing the impact of OPUS 60 in the marketplace. Our Protein A resin has moved through manufacturing scale-up and validation lots have been completed. We are still in beta site testing, and we are awaiting feedback from these sites before finalizing our commercial plans.

Our single-use ATF program continues to move through the development phase, and we will be transitioning into external testing here in the second half of 2015.

Finally, in the bigger picture of the biologics market that our products serve, the demand for monoclonal antibodies continues to expand. Over the past few months, there has been a great deal of momentum in this market.

This includes highly anticipated regulatory approvals of monoclonals targeting PCSK-9 to lower cholesterol and good progress for biosimilar versions of the blockbuster monoclonals Remicade, Rituxan, Enbrel, and Humira. In short, the expansion of the biologics market also expands the opportunities for our products to deliver important production efficiencies and cost savings to biopharmaceutical manufacturers worldwide.

In conclusion, we have executed well in the first half of 2015, and we are confident about our ability to deliver strong growth in the second half, while continuing to invest in opportunities that will drive future growth, including our commercial, regional expansion, product, and branding strategies.

I'll now hand it over to Karen to open up the lines and take some questions.

(Operator Instructions) Drew Jones, Stephens.

Thanks; good morning, guys. Tony, you mentioned OPUS going platform with -- it sounds like multiple customers. When should we start seeing an impact from that?

I think we're seeing it as we move into the second half of this year. When you think about the way OPUS gets adopted, in the first year or two of market adoption you typically get into one column step. Now we're seeing that we're getting into multiple columns steps, and in some cases all three column steps which means, in my mind, that we're moving into a platform.

Okay. Looking at gross margins, it seems like you're being pretty conservative there for the second half of the year. Is that a result of expected strength in OPUS?

Yes, obviously, OPUS is going to be strong in the second half of the year. The mix does change H2 versus H1, and that's why we're seeing a gross margin difference.

Sure, Drew, we're also seeing a little bit of de-leverage on our factories. It's the typical seasonal issues with holiday periods, shutdown periods over the summer and winter months, early winter months.

Okay. Then last one for me, on the new Sigma media that includes IGF, could you maybe expand on that a little bit?

A little bit, yes. Earlier this year, Sigma launched a cell culture media that uses growth factors, basically our IGF-1. Clearly as our partner they see the traction in the marketplace. And the first media that they've developed and launched, new media developed and launched is for fed-batch processes.

Thanks, guys.

Brandon Couillard, Jefferies.

Hi, good morning. This is Sachin in for Brandon. Tony, could you elaborate on the breadth of the OPUS customers to date?

How many of the top 20 biopharmas are active users? And how many of the OPUS 60 users are new, versus prior existing OPUS buyers who are scaling up?

Okay, I'll take that question in segments a little bit. But in terms of the top 25 pharma customers, I would say that our focus for OPUS has been initially on getting the contract manufacturers aligned and using the technology. That clearly is happening.

With respect to the large pharmas, we're also making progress there. I don't have an exact number, Sachin, in terms of how many of the top 25; but the numbers are definitely accelerating and we are very confident about the second half of the year.

Your question about OPUS 60, we've taken additional orders in Q2 and here in Q3, and we have a really healthy pipeline of OPUS 60 opportunities. I think the real advantage that we have now in the marketplace -- and I said this in my earlier comments -- is that the combination of OPUS 45 and OPUS 60 really now allows us to start to convert customers who are using glass columns at this scale and converting them over to prepacked columns. And that's really our focus.

Very helpful. Jon, between your four product segments, could you rank the relative contributions to the 2Q revenue growth, either in terms of incremental dollar contribution or just relative percentage growth?

Yes, I can. I think we published that we had a very strong quarter in affinity ligands, also in ATF products, okay? Then thirdly our OPUS lines; and then fourthly for the quarter would be the growth factor line.

Got it. While it may be too soon, but just curious on the sustainability of the Protein A growth into 2016 from an above-average trend that you've experienced this year so far.

Yes, clearly we're having a very strong year for the affinity ligands. Second half of the year not as strong as the first half, but still it's going to be a good year for us for affinity. It's a little too soon to comment on next year, and we'll know more I think as we get closer to the Q3 earnings call.

Got it. Thank you, guys.

Paul Knight, Janney Montgomery Scott.

Good morning, Tony. The OPUS business, can I assume that it was up sequentially from the first quarter?

Yes, I would say that -- yes. OPUS business in general, we're targeting about and projecting about 50% growth for the year. So I'd say we were a little less than that in the first half, but we'll be stronger in the second. So overall we'll still hit our target of 50%.

50%, or slightly less than the first half?

It was less than that in the first half, but it will be stronger than that in the second half. But for the year it will grow 50%.

Okay.

Just let me add, Paul, just to add maybe a little bit more color on that. As you might recall, we really ramped up our commercial organization towards the end of last year and into -- through Q1. I think what we're seeing now in the second half of this year is the impact of the larger commercial organization.

Okay. Then I noticed within the financials -- what was the tax rate we should be thinking about that was -- what did you have in the 2Q tax rate?

Sure. Well, we typically give guidance for the full year, so our tax rate for the full year is in that range between 27% to 29%.

Okay.

We had a lower tax rate in Q2 based on mix of where our income was coming from, between our Swedish entity and our US entity.

As you know, we pay a 22% tax rate in Sweden; and in the US largely we're not paying tax at all because of the NOLs that we are carrying forward.

Okay. Then the $768,000 fair value adjustment, is there a tax adjustment on that? Or is that a full $0.02 impact in the quarter?

I'm sorry. We're looking here. What? Could you repeat the question?

I saw -- is $768,000 a fair value adjustment in the quarter?

No, you're talking about contingent consideration, Paul; I apologize. Yes, We didn't catch that.

Sure. Every quarter we reevaluate what our current forecast outlook is for the ATF product. And depending on probabilities of meeting certain milestones that are outlined in our purchase agreement with Refine LLC, we basically have to re-true-up the accrual.

Right now we have our accrual trued up. We booked $1.9 million for the first half of the year; $800,000 for the second quarter; and we're fully trued up to what we believe the full-year forecast is and sales forecast for ATF. So we're not expecting any additional accrual for ATF through the second half of the year.

But, however, if we exceed our current sales projection, there is another potential of $200,000 that we could book to meet the variable component of the contingent consideration milestone. But that's the max, Paul.

Okay.

Yes, that's the max this year. Unless -- there's another element of 2016. Right now we think we're well below the 2016 milestones and we will not have to pay a contingent consideration based on 2016 results. So right now we're at zero accrual for that.

Okay, thank you.

Drew Jones, Stephens.

Thanks. Tony, one more. You talked about the strength of ATF in Asia. Have you been successful yet in pushing any other products through those distribution pipelines?

Yes, that's a great question. Clearly, ATF has been a really nice win for us since we acquired the business a year ago. As you might recall, we started to use the distributor network that was selling ATF about a year ago, and we've also added in a commercial lead over in Asia. That actually has really benefited us, and we are seeing now some pullthrough on OPUS and we're getting some important accounts now adopting OPUS in Asia.

Thanks, guys.

Thank you. That concludes our question-and-answer session for today. I would like to turn the conference back to Sondra Newman for any closing comments.

Thank you, Karen, and thanks to everyone who joined us for today's call. Feel free to contact me with any follow-up questions, and have a great day.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a good day.