Repligen Corp (RGEN) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Repligen Corporation Fourth Quarter and Full Year 2017 Earnings Conference Call. My name is Nicole, and I will be your coordinator. (Operator Instructions) Please note that there will be a question-and-answer period (inaudible) I will now turn the call over to your host for today's call, Sondra Newman, Senior Director of Investor Relations for Repligen. Please go ahead.

Thank you, Nicole. Good morning, everyone. On today's call, we are reporting our financial results for the fourth quarter and full year 2017 and will be providing financial guidance for the year 2018. Our President and CEO, Tony Hunt, will discuss recent business highlights, and our CFO, Jon Snodgres, will provide a financial report. During this call, we'll be making forward-looking statements regarding our business goals and our expectations for the financial performance of the company. So we remind you that such statements are subject to risks and uncertainties that may cause actual events or results to differ. Additional information concerning 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 SEC. Today's comments reflect management's current views, which could 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 providing non-GAAP results and guidance. Reconciliation of GAAP to adjusted non-GAAP financial measures are included in the press release that we issued this morning, which is now posted to our website as well as at sec.gov.

Adjusted figures will include the following: revenue growth at constant currency, operating expenses, gross profit and gross margin, operating income and operating margin, net income, 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 non-GAAP measures better enable investors to benchmark Repligen's current results against historical performance and the performance of peers and to evaluate investment opportunities.

And with that, I'll turn the call over to Tony Hunt for business update.

Great. Thank you, Sondra. And good morning, everyone and welcome to the 2017 year-end update. As you saw in our press release this morning, we finished the year strong with an excellent fourth quarter in terms of revenue growth and expanding margins and overall another outstanding year for the company. Our performance fully supports our mission to become an industry leader in delivering innovative technology solutions that sets new standards in bioprocessing by expanding our market share infiltration in chromatography. Combined with new products and developments and strong order demand coming out of Q4, we are well positioned to deliver a robust performance this year.

Before jumping into the quarter details, I want to spend a few minutes discussing our accomplishments and the strategic priorities set up at the beginning of 2017. Execution on our core strategy of accelerating our direct presence in bioprocessing with a focus on single-use in flexible solutions has come a long way in the last 12 months. A year ago, we surpassed $100 million in sales and discussed the importance of continued diversification and expansion of our direct portfolio. We discussed the strategy to drive further adoption of our chromatography and filtration products through technology leadership, our customer-first culture and potential M&A. We said 2017 would be a year of execution. Today, I'll share some points on how we have delivered on this commitment.

We accelerated the adoption and sales of direct products, which jumped over 60% of total revenue in 2017, up from 48% in 2016. And in 2018, we expect direct sales to reach over 70% of revenue. We completed the integration of TangenX and accelerated the adoption of CS TFF single-use cassettes to our expanded sales force. We guided to revenue of $7 million to $7.5 million, and we achieved $7.9 million, representing 37% year-on-year growth.

We acquired Spectrum, our most transformative deal today. Spectrum significantly expanded, not only our filtration portfolio with hollow fiber technology in systems, but also expanded our commercial presence and grew our adjustable market to $1.5 billion. We guided to $17 million to $18 million in sales for Spectrum in our first 5 months of ownership, and we achieved $19.3 million, which represents 24% year-on-year growth versus the comparable period.

We expected the deal to be breakeven to adjusted EPS in 2017 and it's already accretive. We raised over $129 million in cash in a follow-on equity offering, providing flexibility for future investments. We expanded our operations, especially in our OPUS prepacked column line, where we increased our production capacity to 7 suites, reducing lead times for our customers. We moved our prepacked column operations in Germany to a new facility and staffed up to stay ahead of increasing demand.

We identified and signed a lease earlier this quarter for a 64,000 square foot facility in Marlborough, Mass, which will house the manufacturing of TangenX flat sheet cassettes and pilot scale Spectrum TFF systems. We launched exciting new products this year -- last year, including OPUS R, prepacked columns and our single-use XCell ATF 10s, used in perfusion processes. We also launched TFDF filtration products from Spectrum, a real innovation in hollow fiber technology that for the first time in the market combines benefits of tangential flow and depth filtration.

We expanded our commercial organization, and we now have a 95-person team with 54 field employees in the U.S. and Europe and a much deeper direct presence in Asia. We hit close to the high-end of our revenue target for the year, up 35% to reach $141 million with operating margins above 22%. More than 60% growth in adjusted net income and over 40% growth in adjusted earnings per share.

And finally, we achieved organic growth of 9% across our businesses, despite a flat year in our OEM proteins franchise. Excluding OEM proteins, our direct-to-customer products, infiltration and chromatography, had organic growth of 19%, well above the industry average of the year. We accomplished all of this through a remarkable team of employees, now 475 worldwide that has done a great job staying focused on our goals, balancing expansion and integration demands and delivering another outstanding year for the company, our customers and our shareholders, truly an exceptional year.

Moving now to Q4 and full year 2017 performance. As reported today, we had a record quarter with $41.6 million in sales and expanding margins. The story of the quarter was the performance of our direct filtration business, supported by the addition of the Spectrum product line, which contributed to 150% growth in filtration for the full year. Our ATF product line had a record quarter, up over 30% year-on-year, driven by strong adoption of our technology and perfusion in N-1 applications. We also continued to see robust adoption of our single-use ATF products. For the quarter single-use revenues represented greater than 20% of sales and for the year, 15%.

The key trend in Q4 and indeed, for the full year was the expansion of our customer base with the 33% increase in the number of new customers in the quarter. Regionally in North America, new projects emerged at top pharma accounts, and we now have a growing pipeline of opportunities for 2018. Our CS flat sheet TFF cassette business also had a strong quarter and year. The story here was around new accounts and increased demo activity. With healthy Q4 order load, we expect another double-digit growth year here in 2018 for the TangenX business.

Finally, our Spectrum filtration portfolio had a great quarter. Sales were up 19% year-on-year and 24% for the first 5 months of ownership. The story here was around the robust demand for KrosFlo systems, including a record quarter for bench-top TFF systems. We also saw a nice rebound in pro-connect single-use flow path products, which had been flat in the first half of the year, but accelerated in Q4 with greater than 80% growth year-on-year.

Overall, the Spectrum business exceeded our expectations in the first 5 months, and similar to all our direct products, order demand was up in Q4. In 2018, we expect that our Spectrum business will grow approximately 15% on a full year pro forma basis and that overall our filtration business will grow in the range of 15% to 20%.

Moving to chromatography, which is driven by our OPUS family of prepacked columns and also includes ELISA kits and chromatography resins. Our OPUS business had a very strong quarter and year, finishing up over 40% growth for the year. What was really impressive about the year was an increase in total columns shipped, which more than doubled to over 500. We saw strong order loads going into 2018, and we've made the decision to further expand in terms of operators and additional packing suites, which we expect will come online in second half of 2018.

We expect this to be another strong year for chrome business, with revenue growth in excess of 20%. Our OEM proteins business had a predicted light quarter in Q4 and was flat for the full year. As mentioned earlier, this business is highly dependent on 2 large OEM customers who resell to end users. So our quarter-by-quarter sales do not always reflect end-user demand. We were, however, encouraged by additional orders that came in late November and early December. Forecast for ligands and growth factors have strengthened in 2018 versus the initial forecast. We anticipate further strengthening as we go through the year and expect that our proteins business will achieve mid-single-digit growth for the year. Beyond our product performance in Q4, we spent a significant amount of time focusing on the Spectrum integration. With the addition of the Spectrum sales team, we now have 36 sales managers around the world, a four-fold increase in the number of salespeople over the last 2 years. We are confident that the combination of bioprocess account specialists and bioprocess sales specialists, infiltration and chromatography will meet the need of our growing customer base. I spent time in Q4 traveling with our Spectrum reps in Europe and in the U.S., and I was really encouraged by our customers' reaction to the deal and the opportunity to cross-sell the broader portfolio for Repligen products. In addition, with an expanding direct sales presence in Asia, we will be able to increase our face time with our customers and move us beyond a key account strategy in the region. We are excited about the future as the new commercial team moves into their territories at the beginning of Q2. As is expected with a large acquisition, we still have work to do in integration, but the team at Spectrum has been great. The products have differentiated in the market, and customer opportunities are increasing with tier cross-selling opportunities emerging. So as we move into 2018, our strategic priorities will center on 5 areas: commercial and operational integration of Spectrum, including revenue and cost synergies; acceleration of market adoption in Asia; capacity expansion programs and operating margin improvements; next-generation product development and new product launches infiltration and chromatography; finally, continued expansion of market share through organic growth and M&A.

In summary, we had a successful 2017, and we're very excited about our growth prospects for this year. Our investments in our direct-to-customer chromatography and filtration businesses continues to pay off. And our expectation is that these businesses will continue to be the major drivers of growth for the company in 2018 and beyond.

Our R&D pipeline is rich and you can expect to see continued new product offerings, expanding OPUS, ATF, CFs and Spectrum TFF systems and filters. Finally, I wish to thank our employees around the globe, our loyal shareholders and customers for their part in Repligen's progress towards becoming a best-in-class bioprocessing technology company and a trusted partner in the production of biological drugs. I believe we have the right mix of people, products and preparedness to continue to enhance our growth trajectory and deliver outstanding results.

With that, I'll turn the call over to Jon for a more detailed financial report.

Thank you, Tony. And good morning, everyone. Today, we are reporting our financial results for the fourth quarter and full year of 2017 as well as providing our financial guidance for the year 2018. Unless otherwise mentioned, all 2017 and 2018 financial measures discussed reflect adjusted non-GAAP measures. We are reporting the fourth quarter 2017 GAAP revenue of $41.6 million, an increase of 63% as reported and 61% at constant currency compared to the fourth quarter of 2016. We experienced a 1.2% tailwind in sales due to foreign currency fluctuation, which most significantly impacted our proteins business. This FX tailwind was primarily driven by strength in the Swedish krona versus the U.S. dollar.

Our strong fourth quarter of 2017 revenue performance was driven by growth in our direct-to-customer filtration and chromatography businesses. In our filtration business, we continue to gain traction with our single-use ATF Systems as well as with our TangenX single-use cassettes, which grew 85% on a pro forma basis. We also saw sequential uptick in Spectrum product sales to $11.8 million for the quarter, which on a pro forma basis represented 19% year-over-year growth. In our chromatography business, growth continues to be driven by our OPUS family of prepacked columns. The continued strength in OPUS is supported by our expanding customer base and deeper penetration within accounts. Our adjusted gross profit for the fourth quarter was $22.5 million, an increase of $9 million or 67% over the fourth quarter of 2016. Our adjusted gross margin was 57.1% for the fourth quarter of 2017, a 380 basis point improvement versus the comparable 2016 period.

Gross margin impacts were in line with our forecast for the quarter and were driven by strong sales of filtration products in our overall mix. Synergies of now owning the Spectrum filter component of our ATF devices and from improved column-to-resin mix on our OPUS product line, driven by an increase of customer supplied resins in our 45 and 60 centimeter columns.

Now moving to operating expenses. On a GAAP basis, research and development expenses for the fourth quarter of 2017 were $3.1 million compared to $2 million in the comparable period for 2016. The increase in year-over-year spend is attributable to the addition of Spectrum product development activities into Repligen and also due to the timing of milestones for next-generation ATF and OPUS development projects.

Adjusted SG&A for the fourth quarter of 2017 was $12.3 million compared to $7.2 million for the fourth quarter of 2016. Approximately, 70% of our year-over-year increase is related to ongoing expenses from our Spectrum and TangenX acquisitions, which were not included in our prior year comparable figures. Approximately 10% of the increase is related to investments in our commercial organization and the remaining 20% is related to general infrastructure activities.

Now moving to adjusted earnings and EPS. For the fourth quarter 2017, our adjusted operating margin was 20.3%, a 310 basis point improvement year-over-year. Our adjusted operating income grew to $8.5 million, an increase of $4 million or 92% compared to the fourth quarter of 2016. The year-over-year increase was driven by margin pull-through from both organic and acquisition-related sales growth, partially offset by ongoing cost from acquired companies and investments in our global commercial team and infrastructure to support current and future growth.

Adjusted net income for the fourth quarter of 2017 was $8.7 million compared to $3.1 million for the same period in 2016. And adjusted EPS for the fourth quarter of 2017 was $0.20 per fully diluted share, a 116% increase from $0.09 per share for the fourth quarter of 2016. In addition to delivering strong adjusted operating income for the fourth quarter, the company's adjusted net income also benefited from favorable tax provision adjustments of $2.8 million, mostly related to one-time benefits from the vesting of stock compensation and favorable handling of tax treatments on M&A transition costs -- transaction costs, which combined more than offset tax expenses from our operations.

On a GAAP basis, the company realized a $9.6 million net tax benefit in the fourth quarter of 2017 from new U.S. tax reform. This net GAAP tax benefit was adjusted from the company's non-GAAP financial results.

I will now report on our full year 2017 financial results, where we have driven strong revenue growth and operational performance. For the full year, we are reporting 2017 GAAP revenue of $141.2 million, reflecting an increase of 35% compared to $104.5 million reported in 2016. To fully understand this 35% increase, I will break out organic, acquisition and foreign exchange impact on overall growth. First, we are reporting 9% overall organic growth, inclusive of 19% organic growth in our direct-to-customer filtration and chromatography businesses. Second, acquisitions accounted for 27 percentage points of our growth for the year, and we continue to be very encouraged by this performance of Spectrum, TangenX and Atoll, our most recent acquisitions. And third, we experienced net 1% headwind from foreign exchange for the full year of 2017, primarily related to weakness of the Swedish krona versus the U.S. dollar in our proteins business in the first half of the year.

Full year 2017 adjusted operating income grew at $31.6 million, an increase of $4 million or 34% compared to 2016. Our year-over-year increase was driven by margin pull-through from both acquisitive and organic sales growth and gross margin expansion actions, particularly -- partially -- excuse me, offset by investments in new product development, sales, marketing and infrastructure. Full year adjusted operating margin was 22.3%. Full year 2017 adjusted net income was $27.2 million, an increase of $10.3 million or 61% compared to the same period in 2016. Full year 2017 adjusted earnings per diluted share were $0.69, an increase of $0.20 for the same period in 2016.

Our cash and cash equivalents, which are GAAP metrics, were $173.8 million at December 31, 2017. We generated operating cash flow of $17.5 million in 2017 and reinvested $5.5 million into capital expenditures for capacity expansion, system improvements and maintenance activities.

Now moving to 2018 full year guidance. Our GAAP to non-GAAP reconciliations of net income and EPS for 2018 financial guidance are included in the reconciliation tables in today's earnings press release. As previously mentioned, all 2018 financial guidance discussed will be adjusted non-GAAP. Please also keep in mind that our 2018 guidance may be impacted by fluctuation in foreign exchange rates beyond our current projection of a 1% tailwind on sales and does not include the potential impact of new acquisitions. Today, we are setting our 2018 full year revenue guidance, a GAAP metric at $180 million to $186 million, reflecting growth in the range of 27% to 32% as reported and 26% to 31% on a constant currency basis, including 10% to 14% organic sales growth.

Within these growth projections, we expect our OEM proteins businesses to grow approximately 5% in 2018. And our direct-to-customer filtration and chromatography businesses to grow 15% to 20%.

Finally, we expect Spectrum on a pro forma basis to grow at or above 15% and contribute revenues in the $47 million to $50 million range. Our adjusted gross margin guidance for 2018 is 56% to 57%, reflecting roughly a 50 to 100 basis point improvement versus 2017 from expected synergies from the acquisition of Spectrum, improving OPUS margin and from benefits from our material sourcing activities. Adjusted operating income is expected to be in the range of $40 million to $42 million, and our adjusted operating margin guidance is 22% to 23%.

We're expecting 2018 adjusted income tax expense of approximately 19% of pretax income, inclusive of the impact of new U.S. tax reform. Adjusted full year 2018 net income is expected in the range of $30.5 million to $32 million for the year. And our adjusted EPS is in the range of $0.68 to $0.72 per fully diluted share. The company expects to invest an estimated $15 million in 2018 for capital expenditures, inclusive of $5 million to $6 million in our new Marlborough facility. This also includes $4 million to $5 million for the first wave of our expected global ERP implementation with investments expected in the second half of 2018. We anticipate 2018 year in cash, cash equivalents and marketable securities, a GAAP metric in the range of $194 million to $196 million, with our CapEx investments being funded by cash generation from our operations.

In closing, 2017 was another year of excellent performance for the company and we exited the year with a strong and healthy balance sheet, giving us ongoing flexibility to continue to drive meaningful growth. We are confident in our efforts towards our 2018 goals and look forward to reporting on results in the months ahead.

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

(Operator Instructions) Our first question comes from Bryan Kipp of Citigroup.

This is Dan Arias on for Bryan Kipp. Tony, in filtration, seems like some good momentum there and the single-use products. Can you just talk about how much of the ATF filtration business that you do in 2018 comes from single-use? And then maybe just to put some color around the new customers that you've taken there and the opportunity for new customers that you see this year. It seems like that's an important portion of user base right now?

Yes, it is. And when you look at 2017. 2017 was the first-year that we really had the whole portfolio for single-use ATF systems. And because the systems are very, very simple to use, we've lowered the barrier for adoption and trial. So that's why we see -- we've seen such a nice number of increase customers. Now when I look at 2018, we expect that single-use will be north of 20% in terms of contribution to ATF revenue for the year. And the new customers, as I said, are really coming from the simplicity of the technology and just more people are willing to try because now they don't really need an auto platelet to do the initial evaluation of an ATF system.

Okay, great. And then just maybe on expectations for TangenX and hollow fiber. Can you just maybe comment on the selling synergies that you see there? I'm curious what, if anything, you think about incremental opportunity to 2018? And then maybe in a similar vein, you think about capitalizing on the synergies between Spectrum and some of the other stuff in the portfolio? Is there still a sales force investment that you think you need to make in order to maximize that opportunity? Or do you kind of, feel like you have the team in place for 2018, just given the expansion comments that you made?

Yes. So on TangenX, what's nice about that business is that our sales force -- and I look at that as really the combined sales force at this stage. When we go to an account now, we have 2 opportunities to really solve a problem, right? We have opportunity with hollow fiber technology to solve the problem, and we have the opportunity with flat sheet to subs. We didn't have that, neither Spectrum had that in the past, we did not have that in the past. So we're getting some nice wins for the TangenX business just by having a broader portfolio of products. Where we're seeing some nice cross-selling opportunities is with the TFF systems from Spectrum. Both TFF systems typically run hollow fiber cartridges, but they can easily run flat sheets cassettes as well. And because the TangenX business didn't have any systems associated with that portfolio when we acquired it a little over a year ago, it's been a really nice cross-selling opportunity for us, and we're beginning to push some of the TFF systems from Spectrum into TangenX install base. The second part of your question, which is around the sales force investment. I think we've made a lot of progress there. We have 36 sales managers and the way we have divided up our sales team now as we move through 2018 is, for the most part, everybody is a bioprocess account manager, and we've put in each region bioprocess account specialists or sales specialists who are either specialists in filtration or specialists in chromatography. So they all complement the bioprocess account managers that we have in each region. Obviously, we have the luxury now of having 10, 12 more direct sales people in Asia. And I think that's going to play a big role for us. Because up till now, we've been really operating on a key account basis. We're going to get more face time in every region because we really increased the number of sales people in North America, in Europe and in Asia. When I look to investments Dan, I really think it's going to be around field applications and field service. We have a really nice -- nicely growing portfolio of systems at Repligen now between our TFF systems from Spectrum and the ATF Systems from legacy Repligen. And so together, we're really focused now on building out a service organization. We started that journey last year, we made some nice progress. But it's an area where we're going to double down on here in 2018. And I think on the field applications side, that's just an area where it's a matter of having 1 field applications specialist per 2 or 3 reps, and we'll just build that out as we see the need.

Okay. Maybe if I could just ask one last one, I'm sure at this point you've had plenty of conversations on the topic, so I guess what is your sense for GE's, longer-term intention with respect to moving manufacturing in-house, is there anything incremental that you've heard or considering? Or is the view kind of, pretty much unchanged from the way that you were thinking about the things at the Analyst Day?

Yes the view is -- has -- is really unchanged. Clearly, GE is moving to business continuity plan. They're going to make their new ligand in-house, and we expect over the next few years that certain volume will definitely move across into that facility from where we're manufacturing today at Repligen. So no different than what we said at the Analyst Day.

Our next question comes Tycho Peterson of JP Morgan.

This is actually Julia on for Tycho. My first one, I know you guys have been talking about prioritizing, accelerating your penetration in Asia over the next year. So when do you expect the sales in Asia to ramp up?

Yes, I think in terms of where we are today, we've made -- 2017 was a very good year for us in Asia, for Repligen and for Spectrum. So I expect that we'll see a ramp up in 2018 and further acceleration in 2019 and 2020. So it's just a matter of getting everyone on the sales force trained on all the products, we're doing that in Q1. So fully expect that we'll start to see an impact this year.

And is that already factored into your guidance? Or is -- does that represent an upside to number?

I think for this year, we've factored most of that in. Obviously as you train, essentially a new sales team, there are going to be other opportunities that will emerge and we'll assess that and give an update. My guess is, by the time we get to the Q2 earnings call in August, that's probably going to be a good time to follow up and give some insight into how we're doing in Asia.

Okay, great. And then my next question, you guys have been talking about the opportunity to build out service as a business. So could you just maybe elaborate on that a little bit? What is the progress that you've made so far and how big is the opportunity?

Yes, so the service strategy really started a little over a year ago. We built out a service department here at Repligen, really focused on the ATF portfolio. With the addition now of the Spectrum products, there's a fairly broad portfolio of systems there. There's a need to really ramp up on our service organization and that's something that we're focusing on here on Q1. My expectation is that when we get into the second half of this year, we'll have a larger service group and we'll be able to really generate revenues for the whole portfolio of systems that we have today.

And what would be the margin implication of this -- the service component? Would that be accretive or -- to the overall business or...?

Yes, we haven't really ran the calculations on the margins for the service yet, because we really need to dig through exactly what we're going to do with the Spectrum portfolio. Right now, there's not a whole lot of service associated with the -- our service revenues associated with Spectrum portfolio, and we believe that's something that we're going to execute on. So again, I think in another quarter we'll be able to give a little bit more guidance on margins.

I would just add in to that. The part sourcing piece, we should make good margins on. The labor rates will be a little bit lower margin overall, typical of a global service business.

Got it. And then my last one on OPUS. Could you maybe break down how much was the process development versus production scale products in the quarter? And I know you guys talked about your market share in OPUS growing to 40% now, so that's pretty impressive. What is the long-term target that you think can drive towards? And do you kind of see your competitors trying to make similar move in terms of padding the columns and the resins and just in general, how do you maintain your pricing in the prepacked column business?

Okay. In terms of OPUS, large-scale versus like process development products, the large scale products is really what we were referring to in the script this morning. In terms of OPUS PD, which is our small-scale process development portfolio that had an exceptional year as well. We didn't call out what the percentage growth, but I believe it was pretty similar to the large-scale OPUS, somewhere

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staying on customers who are either doing small-scale protein purification, validation studies, some scale-down bio-curing studies. They tend to be the customers that we focus on. And then large-scale, it's really the clinical manufacturing and commercial manufacturing customers. So again, I think large-scale OPUS, clearly another strong year. Hence, our decision to continue to invest in that portfolio of products and in capacity. In terms of market share, continue to take the lion share of this market. And we've made huge progress in the last 4 or 5 years. We have had years now where we've either grown 50% to 100%, last year 40% plus. So we still think there's a lot of runway for our products. We're excited about bringing new OPUS products to the market. We think that will solidify our technology and market leadership position. And our goal is definitely over the next 2, 3 years, get up north to 50% 60% share in the overall market.

And just add -- I think to add to your question, we sell roughly 80% as large column, 20% of the revenue comes from smaller columns directionally. And that moves from quarter-to-quarter, but that's a good approximation for you.

Our next question comes from Amanda Murphy of William Blair.

Just a question on organic growth in the quarter. I think we were coming or backing into mid-single digits. I just -- is that -- I just wanted to make sure that was directionally accurate. And I'm assuming if so, that if there was a sequential decline, that was really the proteins business. Obviously you were giving the guidance for next year, so we should expect an acceleration but just wanted to make sure that was an accurate statement.

Yes so overall for the year, we had 9% organic and our filtration and chromatography products were around 19%. And that actually mirrors what Q4 was pretty closely. So I think your number is on the low side. We were closer to the high end of the range, single-digit range. So -- yes, we were pleased with the performance given that we knew going into the quarter that the proteins business was going to be light. And even though we did see a little bit of increase in orders in Q4, overall, the performance was really strong, given where -- what we were dealing with on the proteins business.

Yes. Okay, it makes sense. And then not to harp on this because I know it's becoming a smaller part of your business. But again, on the protein side, I guess -- I think you had thought maybe we would see an increase in -- or you had seen more positive signs around proteins coming into this quarter as well. So just in terms of how you're thinking about guidance for that part of the business in '18, do you feel pretty comfortable? I know others have said that the overall market is still looking better in '18 versus '17, but wanted to get a sense of your comfort level there.

Yes, so on the market side, completely agree. I -- 2017 was a tough year for the bioprocessing industry. I think Repligen did really well in the year. Our direct businesses really did not see that slowdown, because we obviously grew close to 20% organically last year. As we move into this year, clearly the market is improving. We saw that in Q4 in terms of our order load. Our order load was strong. I think that's very similar to what many of our peers witnessed as well. And then I think on the protein side, yes, we're working through, as we said in November, we're working through the inventory burn off, which is not necessary the ligands and is probably more the resin reduction at our key accounts. And we're working through that in Q1, and we expect that as we go through the year that the overall proteins business, so ligands and growth factors is going to strengthen.

And then just last one. Obviously, you've talked about the strength in OPUS side of the business and the prepacked columns. And you've got the -- this kind of [main] advantage because you're -- you can have

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custom solution, just curious that given the strength there, what are you seeing from a competitive standpoint? Has anyone -- you seeing any change in the larger players' willingness to sort of, be a little bit more willing to pack other resins or that type of thing? Just curious there what you're seeing on the competitive side?

Yes on the competitive side, really there are 2 competitors in prepack columns. One is GE and the other is Millipore. GE did in 2017 bring to market an equivalent 45-centimeter diameter column to what we do. So there is some competition there. We haven't seen any change in strategy at any of the other players in terms of willingness to pack other resins beyond their own internal resins. I think that would change, but at least we haven't seen any indication from our customers or from our sales since that's changing. Look, this is a great business. We expect competition. We believe that we've really created this market over the last 5 years with technology innovation. And as I said at Analyst Day, we're completely committed to bringing additional larger columns into the marketplace and other services that I think will continue to differentiate Repligen in this space over the next few years. And when we look at the competition yes, GE and Millipore are competitors, but we really believe the major player here is self-packed columns done by the customers themselves. So we're really trying to convince customers to move away from glass columns to prepacked columns. And that's where the majority of our focus is.

Our next question comes from Drew Jones of Stephens.

This is James Rutherford on for Drew. Just to start, digging in a little on Spectrum growth. Just given the strong performance since you've acquired the business, well above 15% growth. And then just thinking about the cross-sell opportunities and the investments you're making in operations. I'm just kind of wondering if there's a reason that growth wouldn't continue to track north of that 15% to 2018. So I mean, I guess another way to ask is, is there something unique the last couple of quarters of growth that would not kind of, repeat through 2018.

Yes, with Spectrum, historically, they've had a stronger second half of the year than the first half of the year. So if you remember the -- they had about 7% growth in H1 of 2017. And clearly, we had 24% growth in second half. So essentially, they finished the year with probably close to 14%, 15% in that range. So right in line where you'd expect the business to finish. Obviously, second half of the year being much stronger. Same thing in 2016. I don't have the exact percentages, but the first half of the year was lighter than the second half of the year. And so it's a trend that we're trying to really get our arms around. And as we go through this year, we do think there are some obviously upsides, and so if you think about the $47 million to $50 million guidance on revenue, the $47 million is 15%. So we're expecting that we can, at least hit 15% or maybe achieve a few more million dollars on top of that.

Okay, that's helpful. So now the revenues not only kind of seasonally strong in the second half, but the growth likely would be as well, you said was the case in 2017?

Yes.

So on single-use, clearly, you're having good momentum there and now 20% revenue in the quarter, but just stepping back a little, do you think there's an opportunity for single-use to find a place in commercial production? And if so, when that might kind of, take place?

Yes, absolutely. I think with the use of ATF10 product line, really, at the end of Q2, into Q3 of last year. ATF 10s are used in the production. So for sure, we're in late stage. I'm not 100% sure if we've got any single-use 10s yet in commercial processes, but fully expect that will happen.

Okay, excellent. And then last question, just -- can you share your expectations for adjusted EBITDA in 2018?

Sure. We're looking at about $46 million to $48 million for adjusted EBITDA for '18.

Our next question comes from Matt Hewitt of Craig-Hallum.

Just a couple of questions from me. First one, you've been investing a fair amount into R&D, and you mentioned some of that was related to Spectrum here in the fourth quarter. But how should we be thinking about cadence of new product launches in '18? And will there be any timing-related payments that could create some variability in that segment? Or at the operating expense line in 2018?

Yes, I think our R&D spend in 2018 is not too dissimilar to 2017 on a percent basis. So it's around 6%. We have a number of products that we're teaming up to launch. I think one of the real benefits of the deal that we've done and, actually I would say, for all the deals we've done over the last few years, so if you take TangenX and you take Spectrum and you take what we're doing internally with the ATF product line and with the OPUS product line, I think you should expect to see a steady stream of new product launches over the next 1 to 2 years. And it should -- I think what we're going to look at is as we go through 2018 and as we move into 2019, how much of an increase are we going to put in R&D, especially as we get a better handle on all the opportunities we have to bring new products to the market.

And Matt, in terms of the linearity of spend you asked about, it will be slightly higher or at least we expect it to be in the first half of the year versus the second half, if that gives you an indication.

No, that's great. And then maybe one other question regarding the tax rate. How should we be thinking about that beyond 2018 and -- 19%, does that tick up going forward to 21% that many companies are moving to? Or is there another reason why it would stay down a little bit lower as it gets past this year?

Yes, from a non-GAAP perspective, again we're forecasting 19%. I think as we move forward, it'd continue to be more profitable in the international locations, particularly in Asia and such. We should see a slight uptick in the overall tax rate.

Our next question comes from Brandon Couillard of Jefferies.

This is Christian on for Brandon. Just maybe -- just a quick one on 2018 outlook. Is there anything you would call out in terms of pacing of core growth in '18? Maybe first half relative to second half?

Yes, we would look at our year-end, say that when we look at the whole portfolio between our proteins business our filtration and chromatography business and what the seasonality that we have observed over the last couple of years with Spectrum that the second half of the year will be slightly stronger than the first half.

Got it. And Tony, in your prepared remarks, you had talked about 5 strategic objectives in '18 with fifth being M&A. So to that end, would you comment, at all, on the M&A pipeline and do you think at this point that you have maybe the internal capacity resources to digest another deal given everything going on with Spectrum?

Yes, on the M&A front, clearly the last 2 years have been pretty busy for Repligen in terms of the deals that we've done. Clearly, Spectrum is a transformative deal and you're right, a lot of people within the organization are very focused on it. I will say that we continue to have a very active pipeline of opportunities. And I think that our strategy continues to be the same, which is find great technologies whether they're transformative or tuck-ins, really just depends on the type of companies. But we have an active pipeline and it is a part of our strategy over the next couple of years. We expect that we'll do more M&As. And obviously, I think the other part is that with the rich pipeline that we have in R&D that we should see organic growth being driven by some of the newer products that we're going to launch as well.

Our next question comes from Paul Knight of Janney.

Tony, can you talk to Purolite? Are they up and running? I think they are going to be a customer of yours. Any color there?

Sure, Purolite, they are customer today. I think they're in the process of building their larger facility. I don't have an exact date, but I believe it will come online this year. But again, I think they're one of the emerging players in the ligands and Protein A resin -- I mean the Protein A resin market and expect that they'll continue to be a player over the next few years, for sure.

And you know the -- I know GE talks up their MabSelect PrismA a lot. Is that technology using your ligands? Or are they -- is that in-house? And the other follow-on to that is, in the advancement of Protein A or are they saying your product isn't necessary. I mean -- any color you can add to that?

Sure, on PrismA, that's really the announcement that happened back in September. So essentially, GE will make that -- the ligand for the PrismA resin internally and through an OEM partner as well. So we're not involved in that. And I think we've gone through that a number of times the impact of that ligand on overall revenue for Repligen is really small based on the forecast. And I think maybe the piece that I think we spent a fair amount of time, Paul, talking about is really the longer-term impact. Clearly, GE have a business continuity strategy and as I said a little earlier, we expect that some volume will go up across over the next few years as they ramp up their manufacturing in Sweden.

And then lastly, Tony, the ATF technology seems to be -- it appears to increase productivity by a large factor. What's your -- what's the penetration rate of bioreactors of ATF. I mean, last I remember, it was low, but what's the addressable market? Is all bioreactors could use it? Or is it half? And then where are you with penetration today?

Yes, so the ATF technology is really being used in continuous manufacturing or in perfusion. And perfusion is probably 20% to 30% of the market versus fed-batch is 70% of the market. So the vast majority of bioreactors are operating in a fed-batch mode. So they typically would not use ATF technology. So we're really the market leader in perfusion or continuous manufacturing in that segment. I think we're well penetrated. I don't have an exact number. And I think where we're beginning to make some progress is within the fed-batch marketplace, there's this whole process called seed train, where you go from a very small bioreactor to the production bioreactor over the course of, let's say 10, 12 days. And so what we're doing there is using ATF technology and what's called the N-1 application. So you're concentrating the cells and the smaller bioreactor and you're inoculating that into the large production vessel and eliminating one of the steps in the process. So that's really where we're making some in-roads in the fed-batch manufacturing spaces really in the seed train seat ran application. So ATF single-use has really helped us because it allows customers to immediately evaluate the technology without worrying about other capital expenditures that they have to do. And I think that's really one of the benefits of what we've been able to do by launching the single-use portfolio.

(Operator Instructions) Our next question comes from Steve Schwartz of First Analysis.

My one question is just, really, around some help in bridging your 2018 guidance. Organically, you're looking for revenue growth at 10% to 14%. You're guiding up on gross margin. But if we look at the EPS versus $0.69 you reported for '17, you're really only on the top end looking for 4% EPS growth. You do call out the $1.2 million additional tax and that's about $0.03, but beyond your comment about R&D, I'm just wondering why EPS growth is a little higher for 2018?

Sure. I think I can help you with that, Steve. If you look at the tax, that's going to be your primary driver. You can see from a non-GAAP basis in 2017, we only incurred about $1.6 million of tax expense. And then if you look at the 19% of PBT rate that we gave in our guidance, obviously that's going to add a significant amount more of tax somewhere in the range of $5 million to $6 million more.

Okay, got it. And then you're adjusting -- you made changes to your non-GAAP adjustments, the expenses that are now included in that. And it looks like it added -- it was a benefit of about $0.05 in 2016. What -- how did that work out for 2017? Because if I kind of add up what you reported for first 3 quarters, close to $0.20 in the fourth quarter, it's not obvious to me that there was, in fact, a benefit from the non-GAAP accounting?

I think there was a benefit from the non-GAAP accounting. If you looked -- take Spectrum or TangenX acquisitions, for an example. We capitalized pretty significant pieces of intangible assets that we amortized, obviously, through the years. And those items are non-GAAP, we take deal cost out of the equation as well from a non-GAAP perspective. So it's definitely helping from a GAAP to non-GAAP basis.

Okay. So for example, in the first 3 quarters of 2017, you reported non-GAAP EPS was $0.50. And then today you announced that you're adjusting how you calculate non-GAAP EPS. What is the first 3-quarter EPS tally now, today, after those adjustments in the non-GAAP accounting? It would be higher than the $0.50 you previously reported?

Yes, Steve, I'm not sure we've made a change to our non-GAAP. So I think we're all each other, trying to understand better your question.

So maybe offline, Steve. We can cover that in a little more detail but we haven't changed our accounting.

Okay. I thought I read in the press release that you were changing, and certainly, what you reported for the fourth quarter last year was a penny lower than what you're reporting as the comparable quarter this year. So -- but certainly we can take it offline.

Yes, that'd be great.

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

I'd just like to thank everyone for joining us this morning, and look forward to catching up with you in a few more months when we'll report on our Q1 results. Okay, thank you.

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