Repligen Corp (RGEN) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to Repligen Corporation's fourth-quarter full-year 2016 earnings conference call. My name is Shannon and I will be your coordinator. (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 report our financial results for the fourth quarter and full year 2016, to provide financial guidance for the year 2017, and to discuss recent business highlights. Joining me today are Tony Hunt, our President and CEO, and Jon Snodgres, our CFO.

On this call we will be making forward-looking statements regarding our business goals and our expectations for the financial performance of the Company. We caution you that such statements are subject to risks and uncertainties that may cause actual events or results to differ. Additional information concerning these risk factors is discussed in our annual report on Form 10-K, the current report on Form 8-K which we filed today, and other filings that we make with the Securities and Exchange Commission.

The forward-looking statements in today's discussion reflect management's current views and may become obsolete as a result of new information, future events, or otherwise. The Company does not obligate or commit itself to update forward-looking statements except as required by law.

During this call we will be presenting our financial results for 2016 and providing guidance for 2017 on an adjusted or non-GAAP basis. Our financial results for 2016 will be provided on both a GAAP and non-GAAP basis and our financial guidance will be non-GAAP only.

Reconciliations of GAAP to non-GAAP financial measures are included in our press release issued this morning, which is posted to Repligen's website as well as SEC.gov.

Our adjusted figures will include the following: revenue growth at constant currency, adjusted gross margin, adjusted operating income, adjusted net income, adjusted fully-diluted earnings per share, EBITDA, and adjusted EBITDA. While these adjusted financial measures should not be viewed as an alternative to GAAP measures, the Company believes that the use of these non-GAAP measures better enables investors to benchmark Repligen's current results against historical performance and the performance of peers and to evaluate investment opportunities.

With that, I will turn the call over to Tony Hunt for a business update.

Thank you, Sondra. Good morning, everybody, and welcome to our year-end update. Before jumping into the performance of the Company in quarter four and full year 2016, I want to spend a few minutes covering our strategy and execution over the last few years.

2016 was a milestone year for the Company, surpassing $100 million in revenue in our fifth year as a pure-play bioprocessing company, having transitioned away from by the therapeutic process back in 2012. Over the last five years we focused our efforts on developing and acquiring best-in-class technologies that enable meaningful efficiency gains in the production of biologics.

We have built out our infrastructure and operations both internally and externally. We've invested in our people, bringing in top industry talent and a first-class global commercial team. These investments have resulted in strong and consistent double-digit revenue growth on multiple product lines through internal R&D, like our large-scale OPUS 45, 60, and OPUS R columns, and single-use versions of our market-leading XCell ATF system.

We have also executed on three strategic acquisitions since 2014 that have strengthened our direct-to-customer portfolio and positioned us well in the market as single-use and continuous processing technologies gained further traction. All three acquisitions are a strong fit with our business and we have successfully leveraged our commercial team and infrastructure to accelerate the growth and adoption of these assets.

Driven by this combination of internal innovation and acquisition, we have established the Repligen brand to represent both technology leadership and premier customer experience in the world of bioprocessing. Most importantly, we have pivoted the Company so our direct-to-customer product portfolio has grown over sixfold and now represents approximately 50% of product revenue in 2016 compared to only 20% in 2012.

Looking back now to the beginning of 2016, we defined some clear goals around long-term supply agreements, capital financing and allocation, new product introductions, and M&A. I am proud to say that our company of now 235 employees has achieved these goals.

We first renewed our long-term supply agreements for our core Protein A business with GE and Millipore Sigma with extensions through 2019 and 2023, respectively. We raised over $100 million in a convertible bond offering in May, which set us up well for internal investments in M&A activity.

We executed on two acquisitions in 2016, acquiring Atoll GmbH in April and TangenX in December. Atoll strengthens our chromatography business by expanding our leadership position in prepack columns, while TangenX strengthens our filtration business by expanding our applications into downstream filtration.

We launched two new product families in quarter three and quarter four with the introduction of single-use XCell ATF systems to align with single-use and continuous workflows and the introduction of OPUS R technology, enabling the recovery of high-value chromatography resins from our prepack columns. Finally, we exceeded our expectation on revenue and overall growth targets for the Company for the year.

Moving now to quarter four and full-year 2016 performance, as reported today we have strong sales of our bioprocessing products. Our full-year sales of $104.5 million increased 25% year over year following an exceptionally strong 2015. As the number of product lines that we offer continues to increase, going forward here in 2017 our commentary will be on our three businesses: chromatography, filtration, and protein.

Our chromatography business includes our pre-packed columns, our Protein A resin, and ELISA kits. OPUS was one of the main drivers of growth in both the quarter or the year, but particularly strong demand for 45 centimeter and 60 centimeter columns. Regionally we saw increasing sales in Asia and in the Americas in the quarter, with all three regions, including Europe, performing well for the year.

We continue to see strength in our core CMO and large pharma accounts with basically a 50/50 split for the quarter and for the year. We are also encouraged by the increasing number of key accounts who have platforms on this technology. Probably most encouraging was the overall column demand in quarter four, where we delivered close to the same number of large-scale columns in the quarter as we shipped in the whole of 2015.

This acceleration supports our decision to expand our production capacity in quarter three and we are pleased that we are on track to add two more production suites here in Q1 2017. The addition of OPUS R to the portfolio has been well received by our customers, who value the ability to recover chromatography resins from our largest columns and we will be shipping OPUS R columns by the end of this quarter.

The OPUS PD product line, which we acquired from Atoll GmbH back in April, also had good performance for the quarter, right in line with our deal model for the nine months of ownership in 2016. Our customers are benefiting from a combination of our large OPUS columns and the smaller OPUS PD columns for early scale up, screening, validation studies.

Our chromatography business approximately doubled in 2016, led by the OPUS portfolio, which grew well over 100% for the year. We expect another strong year for OPUS and strong double-digit growth for our chromatography business here in 2017.

Our filtration business includes our XCell ATF and TangenX products. Having acquired TangenX in mid-December, our filtration business was essentially ATF in 2016. We had a solid fourth-quarter for ATF and strong double-digit growth for the year, which was very encouraging given the strong performance of the product line in 2015.

Most encouraging about the quarter and the year was the increased amount of small-scale systems and consumable filters, where we observed approximately 50% growth. This gives us confidence around our future funnel and bodes well for adoption of our single-use XCell ATF systems currently available in small and midscale sizes. The newly introduced XCell single-use ATF products performed well in the quarter and we believe this demand will continue to accelerate as we go through 2017 where the barriers for trial and adoption are lower due to the ease of use of the single-use product line.

In addition to the XCell ATF filtration line used in upstream processes, our acquisition of TangenX adds a single-use TFS filtration product line used in downstream formulation and drug concentration to our portfolio. In 2017, we expect these single-use TFS products to contribute $7 million to $7.5 million in revenue and overall we expect strong growth for our filtration business in 2017.

Moving now to our proteins business, which comprises our growth factors in Protein A ligand products. As a reminder, we sell growth factors through an OEM distribution agreement with Millipore Sigma, our Protein A ligands through long-term supply agreements with GE Healthcare and Millipore Sigma primarily.

For growth factors, we recorded strong growth in the quarter and for the year, similar to the previous year. We have benefited from commercial biological drug sales utilizing growth factors, development of next-gen commercial processes for on-market biologics, and the platforming of the technology at specific accounts. Following a record performance here for Protein A ligands in 2015, this line was essentially flat for the quarter and for the year as end-users worked off excess inventory due to slower-than-anticipated sales of major drugs approved in the prior year.

The encouraging news is that Protein A ligands forecasts from our customers have improved here in Q1 2017 and that there is a healthy pipeline of monoclonal antibodies in the queue for approval, with 10 in review and over 30 in Phase 3 clinical trials as we entered the year. So, overall, we expect mid single-digit growth from our proteins business here in 2017.

In summary, we had a successful 2016 and we're excited about our growth prospects for 2017. Our investments in our direct-to-customer chromatography and filtration businesses continue to pay off and our expectation is that these businesses will be major drivers of growth for the Company in 2017.

Moving over to our commercial expansion plans. As discussed throughout 2016, we continue to invest in our commercial team and our plan is to add sales and field application specialists in the first half of the year in North America and Europe, where there is accelerating demand for our products. Out of R&D you can expect to see continued new product offerings as we complete our single-use ATF portfolio with the technical launch of a single-use ATF 10, our largest ATF system, towards the end of the first half of 2017.

This year our strategic priorities will be centered on four areas: continuing investment in expansion of our commercial organization and global footprint; accelerating the global market adoption of our proprietary products, including our recently acquired TangenX and Atoll portfolios; improving operational effectiveness with a focus on delivery times and gross margin optimization; strengthening of our core businesses through acquisitions and our strategic partnerships.

We are off to a good start in 2017 with a healthy pipeline of opportunities in each of our businesses. We will continue to execute on our strategy of launching great products through internal development and strengthening our position in the market with bolt-on acquisitions that provide breadth and depth to our current portfolio of products and positions us well for long-term growth.

We have made huge strides in transforming the Company to a direct-to-customer bioprocessing company and 2017 will be another big step for us in solidifying our market position and growing a leading brand in the bioprocessing industry.

I will hand it over to Jon for a finance update.

Thank you, Tony, and good morning, everyone. Today we are reporting for our financial results for the fourth quarter and full year 2016, as well as providing our financial guidance for the year 2017.

As a reminder, we will be discussing our results and projections using non-GAAP financial measures with respect to our performance. We use these non-GAAP indicators for financial and operational decision-making and as a means to evaluate our performance.

As we move into the financial discussion, please recall that we closed on the acquisition of TangenX on December 14. And our fourth-quarter and full-year 2016 non-GAAP financial statements include approximately $120,000 of TangenX revenue recorded before the end-of-the-year holiday shutdown period. The acquired business incurred a small loss in the fourth quarter due to timing of the acquisition we consider de minimis to our overall results.

Now moving to our fourth quarter of 2016 adjusted non-GAAP financial results. Our financial results for the fourth quarter of 2016 were highlighted by strong sales of our bioprocessing products. We are reporting total revenue of $25.6 million, an increase of 19% as reported and 21% constant currency compared to the fourth quarter of 2015.

Our gross profit for the fourth quarter was $13.4 million, an increase of $2.1 million, or 19%, over the fourth quarter of 2015. Our gross margin was 52.5% for the fourth quarter of 2016 compared to 52.7% in 2015. The change in year-over-year gross margin is the result of product mix predominately driven by strong sales for our OPUS prepack columns, inventory step-up charges from our TangenX acquisition, and from operational investments made in our facilities to support the growing demand for our products.

Adjusted operating income for the fourth quarter of 2016 grew to $3.8 million, an increase of $0.4 million, or 11%, compared to the fourth quarter of 2015. The year-over-year increase was driven by margin pull-through from our sales growth, partially offset by additional product development and validation investments for single-use ATF systems and OPUS R, as well as investments in our sales and marketing teams to continue to fuel ongoing growth. Fourth-quarter adjusted operating margin was 14.8%.

Adjusted net income for the fourth quarter of 2016 is $2.6 million compared to $2.2 million for the same period in 2015. And adjusted EPS for the fourth quarter of 2016 was $0.08, an increase of $0.01 compared to the fourth quarter of 2015. Adjusted EBITDA for the fourth quarter of 2016 was $5.4 million compared to $4.3 million for the same period in 2015.

I will now report on our full-year 2016 results where we have driven strong revenue growth and operational performance. For the full year 2016 we are reporting product revenue of $104.5 million, an increase of 25% as reported and 26% at constant currency, compared to $83.5 million reported in 2015. The major driver of our growth in 2016 was our chromatography business, with solid contributions from our filtration and protein businesses.

Full-year 2016 adjusted operating income grew to $21.4 million, an increase of $3.6 million, or 20%, compared to 2015. The year-over-year increase was driven by margin pull-through from sales growth, partially offset by investments in new product development and validation and in sales and marketing. Full-year adjusted operating margin was 20.5%.

Full-year 2016 adjusted net income was $15.1 million, an increase of $1.7 million, or 13%, compared to the same period in 2015. Full-year 2016 adjusted earnings per diluted share were $0.44, an increase of $0.04 from the same period in 2015. Adjusted EBITDA for the full year 2016 was $25.9 million compared to $22 million for the same period in 2015, reflecting an increase of 18% over the prior period.

Our cash, cash investments, and marketable securities at December 31, 2016, were $141.8 million.

Now moving to 2017 full-year guidance. Please keep in mind that our 2017 guidance may be impacted by fluctuations in foreign-exchange rates beyond our current projected headwind, 2% on sales, and does not include the potential impact of new acquisitions.

As we move into 2017, we will be excluding non-cash intangible amortization expenses from our non-GAAP financial statements as we believe this change enables us to more appropriately reflect the true operating performance of our company.

Starting with our first quarter of 2017 earnings report, our GAAP to non-GAAP reconciliations will include adjustments for intangible amortization. Unless otherwise mentioned, all 2017 financial measures will be reflected as adjusted non-GAAP.

For your models today I will also provide you with a 2016 information update related to the effects of adjusting intangible amortization and the associated tax implications. For the full-year 2016, intangible amortization totaled $2.1 million, with $0.6 million included in cost of goods sold and $1.6 million included in SG&A expenses.

An increase in tax expense of $0.4 million should be applied to the adjustment of intangible amortization as a partial offset to the income improvement in your models. This equates to an adjusted operating income impact of plus $2.1 million and adjusted net income impact of plus $1.7 million and an adjusted EPS impact of plus $0.05, compared to what we have reflected in our GAAP to non-GAAP reconciliation tables in today's earnings press release.

For full year 2017 please refer to our earnings release, which was filed with the SEC today, which outlines the details of all of our non-GAAP exclusions which include intangible amortization expenses, acquisition expenses, non-cash interest expenses, and an unfavorable adjustment for income tax expense. These adjustments combined to a non-income -- operating income impact of plus $3.3 million and a net income impact of plus $6.8 million, which translates to between $0.19 and $0.20 per fully-diluted share of EPS for the year 2017.

Today we are setting our 2017 full-year guidance for revenue at $121 million to $126 million, reflecting growth in the range of 16% to 21% as reported or 18% to 23% on a constant-currency basis. Our adjusted gross margin guidance for 2017 was 55.5% to 56.5%. Total adjusted operating income guidance for 2017 is expected to be in the range of $27 million to $29 million, or greater than 20% of revenue.

We are guiding full-year adjusted cash interest expense of $2.4 million related to the full-year impact of our convertible debt financing. We are expecting 2017 adjusted income tax expenses of $6 million to $6.5 million. Adjusted full-year 2017 net income is expected to be in the range of $18 million to $20 million and full-year adjusted EPS is expected to be in the range of $0.54 to $0.59.

Adjusted EBITDA is expected to be in the range of $31 million to $33 million for the year 2017 with depreciation expenses in the range of $4 million to $4.5 million. The Company expects to spend $6 million to $7 million in capital expenditures to support maintenance and continued factory expansion in 2017. We are expecting 2017 year-end cash, cash equivalents, and marketable securities of $150 million to $152 million.

This completes our financial report. I will now turn the call back to the operator to open the lines for questions.

(Operator Instructions) Brandon Couillard, Jefferies.

Thanks, good morning. Appreciate all the detail there, Tony.

Just in terms of the Protein A business, has your visibility gotten better over the last several weeks? You seem to point to an improving forecast from GE and Millipore, your partners there. Is it fair to say that you have contemplated a low single-digit growth outcome for that side of the business this year?

Overall, as we discussed in prior calls, the ligands business was a lumpy business in 2015 and we definitely saw inventory burn off at both our customers and their customer end-users. But, for sure, as we move through Q1 the forecasts have strengthened and so we are encouraged by that. And I think we are also encouraged by the fact that the pipeline of mAbs that are up for approval is still very healthy.

So, yes, I think in terms of mid single-digit growth for that overall business is what we are anticipating.

And then one for OPUS. You pointed to adding two new production suites in the first quarter here. At some point will it become more realistic or more -- let's say at some point will you begin to think about shifting production capacity more into the local markets outside of the US, closer to the customer base in Europe and Asia?

And as you add additional capacity is there any additional value you can extract from perhaps allocating some of that capacity to a few of the larger customers that have platformed on OPUS; there is a wide adoption?

Yes, it's purely -- 2016 was a milestone year for the chromatography business and for OPUS in general. And I think our number one goal last year was to drive down lead times as the demand clearly went up significantly.

So when we brought on the two new suites in September, that was to really drive down the lead times from where we were midyear to where we ended up at the end of the year. We are right now down into single-digit weeks as lead times for the product, so it has come down pretty significantly.

Adding in the two new suites that we're doing right now is adding further capacity for us. It's giving us more flexibility for those large customers that you referred to, so we will be able to use those suites in a way that -- we can use it for specific accounts or opportunities are going to crop up with very short lead times. So it's giving us a lot more flexibility.

And for sure, as we look towards the rest of this year and into 2018, our goal would be to put some production suites into Europe. Right now I think we're doing a really good job of getting the lead times down to where they need to be. We are scheduled to put in those production suites by the end of the year, beginning of next year and that's the plan as we start 2017. But I think that's really a quick update on that.

Super. Then just one for Jon. You spiked out the TangenX revenue contribution late in the fourth quarter. Can you give us the total revenue impact from M&A, which I guess would include Atoll, both in the fourth quarter, and then what you contemplated in the guide for 2017? Trying to get to an organic number.

Sure. We gave you -- the guidance for Atoll was earlier in the year, $3 million to $3.5 million. We're comfortably within that range for this year in actual revenue; that should give you one pivot point. TangenX you have at $120,000 for the year and then we had guided separately the TangenX business to be between $7 million and $7.5 million for 2017.

And we expect the OPUS PD product line, the former Atoll business, to grow in double-digits.

Great, thank you.

Drew Jones, Stephens.

Thanks. Good morning, guys. Just looking at the margins a little bit, and understanding there are a lot of moving pieces, especially as it pertains to OPUS. Has the incremental capacity for OPUS had an impact on margins there or is the growth that it's not having an impact?

Yes, so it has had an impact. We have added basically CapEx into our facilities so that is some additional depreciation cost. We have added personnel as well; we've expanded to a second shift and really we're trying to stay ahead of the growth curve on OPUS. So it's definitely -- cost adds have had some impact, the mix has had some impact.

In the fourth quarter we typically have, also as we've spoken about in prior years, some effect from year-end shutdown periods and that type of thing. As we go forward, we are optimistic that we can drive a little bit of margin expansion this year and we are guiding between 55% to 56.5%.

The challenge with OPUS is really, as customers adopt the product line, having them basically procure the resin where they get bigger discounts than we do on the resin. Drop ship that resin to us and thereby improving our mix of columns versus resin mix. And so that's one of our key areas of improvement this year and we are expecting to see some benefit from that.

Then I know when you guys announced TangenX you talked a little bit about the constraint being on distribution salesforce. As you plugged it into your commercial organization, where is the easiest cross-sell? Is it your OPUS customer or somewhere else?

It's definitely the OPUS customer because the TangenX technology, the TFF single-use product line, it's the next step after the OPUS columns. So it's natural for a sales call point for our sales reps. They can talk to their customers about OPUS and then there is a conversation that can happen around concentration of the mAb or the protein post the third column in the process.

The good news is, as we have obviously built out a commercial organization over the last three-plus years, many of the people that we've brought on board have a filtration background. So this is an easy hit for them and adds quite nicely into the portfolio. Their experience works and I think the call point works for us as well.

Thanks, guys.

Paul Knight, Janney.

Hi, Tony. Can you talk about market uptake on the polymer version of ATF? That rollout, what, September occurred?

Yes. We launched the single-use version of ATF. We launched a single-use ATF 2 and an ATF 6 in September and we hit exactly what we were forecasting for the year, so we actually had very good traction in Q4.

We think that the advantage of the single-use product is clearly around ease of use and ease of implementation and that's what the customers are experiencing. So again, this year we expect that we will continue to see a good uptick in single-use sales and obviously launching the single-use ATF 10 gives us the full portfolio. So customers who are buying and implementing at a 2 or a 6 have a path forward to a 10 and late clinical or commercial scale processes.

We expect, obviously, not a huge amount of revenue from single-use in 2017, but clearly as we go through the next two, three, four years it's going to be one of the major drivers of growth for that product line.

Then looking at the Atoll and the TangenX acquisitions, are they able to be tucked in to your existing salesforce or is that why you need to add more people?

Could you talk about the level of synergy you are getting from these acquisitions? Is it a new salesforce you are having to build? Can you talk to the possible synergy in the distribution part of the business?

Sure, I'll start with Atoll. Clearly Atoll, which is now OPUS PD, which is small-scale columns, fits very, very well with our overall OPUS portfolio and is a natural call point for our sales team. So instead of talking to, let's say, the manufacturing organizations with the OPUS PD product line. It's really with the process development groups.

And for TangenX, as I said a few minutes ago, it's a natural fit with the OPUS call point, as well as our sales folks are talking to the exact same end-user. I think, when we look at our overall business, the addition of the salespeople is really not necessarily due to the impact of Atoll or TangenX. It's just really the acceleration we are seeing of our direct-to-customer products.

And so as I sat down in Q4 and started to look at our -- at the regions and at the territories, we could see areas in North America and in Europe where we had significant amount and needed more feet on the street. So that's really the rationale around adding the salespeople.

The field applications folks are coming in really to have more of the technical conversations with our customers. So as our product line gets a little bit more complex and complicated as you go from pre-packed columns to selling ATF systems for fusion or hybrid profusion processes and now talking about TFF platforms down in the purification part of the workflow, they become a little bit more technical in terms of the conversations and require a combination of sales and field applications people to have the right interactions with our customers.

Again, I think we signaled this last year that we would be adding in-field applications people. And again North America and Europe is where we are adding FAS and we will be adding a person into Asia as well to support the growing business there.

Then my last question, Tony, is the Samsung and WuXi expansion, the huge expansions that they are doing in the Asian markets. Is that good for your business or what is the effect of what they are doing?

In general, the Asia market has been -- we've done very well over there over the last few years. We've gone from almost a standing start with very little revenue to now 8% to 10% of the revenues of the Company are coming from Asia.

So you can see the progress we've made and I think when we look at companies like WuXi and Samsung, and there are other companies over there as well that are expanding, that's good for bioprocessing. It's good for Repligen, especially if you have your products in their workflows.

Thank you.

Matt Tiampo, Craig-Hallum.

I just have a quick one. Congrats on the quarter and strong finish to the year. What was the mix within OPUS of drop ship resin versus resin that you were procuring yourself as you exited 2016?

So, Matt, it hasn't changed that much since our Q3 call. I think back in Q3 we were -- I think we signaled that it was around a 50/50 mix and that's where we ended for the year, more or less. I would say as we go into 2017 I expect that we will see a shift towards a 60/40 split.

I'm not saying that that's exactly how we will end up, but that's really the direction we are going in as more large pharma and more multi-column orders come through. The natural progression is for those customers to drop ship the resins to us and that's definitely the trend we are seeing.

Great, thanks very much.

(Operator Instructions) I'm showing no further questions at this time. I would like to turn the call back over to Tony Hunt for closing remarks.

Great. I'd just like to thank everybody for joining us and look forward to bring you up to speed in a few months on our Q1 results. Thank you.

Ladies and gentlemen, this concludes today's conference. Thanks for your participation and have a wonderful day. You may now disconnect.