Repligen Corp (RGEN) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Repligen Third Quarter 2018 Conference Call. (Operator Instructions) Please also note, that this call is being recorded. I would now like to turn the call over to your host for today's conference, Sondra Newman, Senior Director of Investor Relations for Repligen. Please go ahead.

Thank you, Chris. Good morning. On today's call we're reporting our financial results for the third quarter of 2018 and updating our financial guidance for the year. Repligen President and CEO, Tony Hunt, will share our business highlights for the quarter; and our CFO, Jon Snodgres, will provide a financial report.

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

Today's comments reflect management's current views, which could change as a result of new information, future events or otherwise. The company does not obligate or commit itself to update forward-looking statements, except as required by law.

During this call, we will be providing non-GAAP results and guidance. Reconciliations of GAAP to non-GAAP financial measures are included in the press release that we issued this morning, which is posted to Repligen's website as well as on sec.gov.

Non-GAAP figures will include the following, revenue growth at constant currency, gross profit and gross margin, operating expenses and income tax expense, 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 these 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.

Now I'll turn the call over to Tony Hunt.

Great. Thank you, Sondra. Good morning, everyone, and welcome to our Q3 earnings call. 2018 continues to be a very positive year for Repligen driven by the strength of our direct filtration and chromatography product lines and reflecting the successful integration of the Spectrum products into our commercial organization. Recall when we guided for the year back in February, we believed that revenue for the second half of 2018 will be stronger than first half and that is exactly what is playing out.

For the third quarter, our sales and orders were up significantly versus prior year and adjusted operating margins came in at 22.8%. We are well positioned for an excellent finish to 2018 and are raising our full year revenue guidance to the range of $191 million to $194 million, with overall organic growth guidance of greater than 15%.

Strategically, we executed on 2 external agreements in the quarter. The first with Sartorius Stedim Biotech to integrate our XCell ATF controller technology into their BIOSTAT STR line of single-use bioreactors. This is an important agreement for both companies and our respective customers. It brings together 2 leading technologies and provides customers with a single controller interface that can manage all aspects of cell culture growth from process development to clinical production. Our R&D teams are busy working together towards the mutual end goal of delivering an integrated controller to customers by the end of 2019 or early 2020.

Second, we finalized a 10-year agreement with Purolite Life Sciences around the exclusive supply of our NGL-Impact A ligand, which will be commercialized on Purolite’s agarose bead. Our scale-up and validation work for this high-performance ligand is right on track and Purolite customers have been actively evaluating the end chromatography resin since early Q3. We are hearing positive feedback on the performance and have confidence that it will gain meaningful market attraction -- traction in the coming years.

Turning to Spectrum. As I mentioned, we completed the overall integration of the hollow fiber TFF portfolio at the commercial level and we continue to see strong market momentum with excellent cross-selling and regional opportunities. We set a year 1 target of $2 million to $3 million in revenue synergies and we are right in the middle of this range through the first 9 months of 2018.

The majority of our revenue synergies in year 1 representing 60% to 70% are coming from cross-selling opportunities, with the remaining 30% coming from broader market adoption in Asia, and a small percent from new products. Within the product lines, our flat sheet cassette business is benefiting the most, with approximately 40% of the synergies; while OPUS, ATF, and Spectrum hollow fiber TFF products are showing some good gains from cross-selling activities.

Finally, our R&D team continues to execute on strategic programs with our first set of next gen ATF controllers delivered to a key customer during Q3, keeping us on-track to hit all of our R&D milestones for 2018.

Moving on to our Q3 financial results and year-to-date performance. Organic growth for our direct filtration and chromatography businesses was again over 20% and our OEM proteins business also delivered a strong quarter with growth north of 20%. Through 3 quarters, our direct businesses are up 24% organically, while Spectrum is up 28% on a pro forma basis.

But diving now into the individual businesses. Our filtration business accelerated in the third quarter with excellent performance in ATF, flat sheet cassettes and Spectrum products. Our single-use ATF product line continues to do really well, up over 100% year-on-year with multiple customers moving to the larger units as they scale and implement the technology in later-stage clinical processes. We now expect the single-use systems to comprise 25% of overall XCell ATF sales in 2018, up from 15% in 2017.

More importantly, as we detailed in our last earnings call, we are seeing strong interest from large pharma as they evaluate the technology for short-term perfusion applications like N-1.

In our flat sheet CS cassette business, we've expanded our customer base outside the U.S., with sales in both Asia and Europe up more than 50% as a direct result of the broader sales force in those regions and the cross-selling synergies coming from the Spectrum deal. With a record order quarter in Q3 and a new production facility coming online here in Q4, this business is well positioned for continued growth.

Finally, the Spectrum business continues to exceed our expectations. The main driver of growth was in our single-use flow path assemblies with significant wins in vaccines, nanoparticles and gene-therapy applications. The breadth and depth of applications for hollow fiber modules and systems is one of the main reasons why this business has outperformed so far in 2018.

In chromatography, this business has also experienced strong double-digit growth, up over 20% for the quarter. The volume increase in large-scale OPUS columns was north of 30% and the order demand in the quarter was very strong. With key pharma implementations spanning applications from mAbs to gene therapy and from fed-batch to continuous manufacturing, this business has healthy momentum going into Q4 and into 2019.

Finally, our proteins business has an excellent quarter with growth greater than 20% year-over-year. Our focus for proteins continues to be on developing a Repligen-owned portfolio of affinity ligands as part of our long-term growth strategy.

Overall, we've advanced very well towards the goals we set for ourselves in 2018. We have successfully integrated Spectrum. We have signed key strategic partnerships. We have launched innovative new products on time. We are clearly benefiting from strong execution by the internal team and by the performance of our 35-plus sales team in the field and by our expanding presence in Asia.

With a strong sales pipeline and order load, we're very confident about our finish here in 2018. And I look forward to updating you in February on our overall performance and will hand the call over to Jon now to walk through our financial results.

Thank you, Tony. And good morning, everyone. Today, we are reporting our financial results for the third quarter of 2018 as well as updating our financial guidance for the year. Unless otherwise mentioned, all financial measures discussed reflect non-GAAP measures.

As you've seen in our press release this morning, we delivered strong financial performance for the third quarter of 2018 and year-to-date and are increasing both top and bottom line guidance for the full year.

Our organic revenue growth in the third quarter grew by 24%. Adjusted operating income grew by 47% and adjusted fully diluted EPS grew by 28% compared to the third quarter 2017. Our focus on bringing differentiated new technologies to market and on successfully integrating our sales, field application and service teams were key drivers of this growth, allowing us to capitalize on the strong market conditions in our industry.

In addition, we continue to execute at a high level operationally, while making disciplined investments in capacity expansion, system enhancements and human resources to support our short- and long-term growth.

Now to provide more color on our overall financial performance. We are reporting third quarter 2018 GAAP revenue of $49.5 million, an increase of 35% as reported and 36% at constant currency compared to the third quarter of 2017. Of the 35% reported growth, 24% was organic and 12% was attributed to our August 2017 acquisition of Spectrum, with a 1 point offset coming from foreign exchange.

As Tony mentioned earlier, our direct to customer filtration and chromatography franchises continued to perform well, with organic growth of greater than 20% for both the quarter and year-to-date.

Consistent with the first half of the year, our direct products represented approximately 70% of the company's total revenue in the third quarter.

Regionally for the third quarter of 2018, Asia, North America and Europe accounted for approximately 12%, 49% and 39% of overall sales, respectively, similar to what we saw in the first half of the year.

Overall revenue growth during the quarter was strongest in Asia and North America, both up over 40% compared with the third quarter of 2017. Driving the growth in Asia, we saw an acceleration in demand for Spectrum hollow fiber and flat sheet TFF filtration products as well as OPUS prepacked columns. In North America ,sales of ATF systems, Spectrum filtration products and OPUS were key drivers. Our direct products in particular continued to drive exceptional growth, year-to-date sales up over 50% in all 3 regions.

Moving now to our income statement. Third quarter adjusted gross profit was $27.5 million representing an increase of $8.1 million or 41% over the third quarter of 2017. Our adjusted gross margin was 55.6% for the third quarter of 2018 compared to 53.3% for the third quarter of 2017, an increase of 230 basis points. We saw strong contributions to gross profit driven by growth from all product lines during the 2018 quarter.

With respect to operating expenses, research and development costs for the third quarter of 2018 were $3.6 million on a GAAP basis compared to $2 million in the 2017 period. During the quarter, we invested primarily in our next generation ATF controllers, our ligand development programs and in filtration product development activities.

We continue to expect R&D expense to be approximately 8% of revenue for 2018. Adjusted SG&A for the third quarter of 2018 was $12.6 million compared to $9.8 million for the third quarter of 2017. Roughly 40% of the year-over-year increase in SG&A is related to the timing of our Spectrum acquisition. And the remainder is tied to the expansion of our field applications and field service teams and systems and infrastructure to ensure a high-quality customer experience.

Now moving to adjusted earnings and EPS. In the third quarter of 2018, our adjusted operating income was $11.3 million, a 47% increase compared to $7.7 million reported in the third quarter of 2017. Our adjusted operating margin was 22.8% compared to 21% for the 2017 period. Adjusted net income for the third quarter of 2018 was $9 million, an increase of 37% compared to $6.6 million in the same period in 2017.

Adjusted EPS for the third quarter of 2018 was $0.20 per fully diluted share, a 28% increase compared to $0.15 per share for the third quarter of 2017.

Our cash and cash equivalents, which are GAAP metrics, were $190.3 million at September 30, 2018, reflecting cash generation of $16.5 million year-to-date in 2018. On a year-to-date basis, we generated free cash flow of $18.6 million, inclusive of $27.2 million operating cash flow plus $8.5 million of capital investments.

Now moving to 2018 full year guidance, where you have seen in our press release this morning that we are raising our revenue, adjusted net income and adjusted fully diluted EPS expectations. A GAAP to non-GAAP reconciliations for 2018 financial guidance are included in the reconciliation tables in today's earnings press release. As previously mentioned, unless otherwise noted, all 2018 guidance discussed will be non-GAAP.

Please also keep in mind that our 2018 guidance may be impacted by fluctuations in foreign exchange rates beyond our current projection of no impact on sales and does not include the potential impact of any new acquisitions.

Today, in recognition of our strong markets and overall execution, we are increasing the midpoint of our 2018 full year revenue guidance, a GAAP, metric by $5 million and tightening our range to $191 million to $194 million. This revised guidance reflects growth in the range of 35% to 37% as reported and on a constant currency basis with 15% to 17% organic sales growth. We are also tightening our gross margin guidance for 2018 to approximately 56%.

For adjusted operating income, we are increasing our guidance by $1 million at midpoint to a range of $40 million to $42 million and maintaining adjusted operating margin in the range of 21% to 22% of revenue. We are reducing our 2018 adjusted income tax expense guidance to 17% of adjusted pretax income.

For adjusted net income, we are increasing our guidance by $1 million at midpoint to a range of $32 million to $34 million for the year. And we are raising our adjusted EPS guidance by $0.02 at midpoint to the range of $0.71 to $0.75 per fully diluted share.

We are also increasing our adjusted EBITDA guidance to a range of $43.5 million to $45.5 million.

The company now expects to invest $13 million in 2018 for capital expenditures, a reduction of $2 million from our previous guidance due to the timing of payments related to our ERP system implementation. The projected 2018 investment of $5 million to $6 million in our new Marlborough filtration facility is unchanged and we look forward to the opening of this site before year-end.

We continue to expect 2018 year-end cash, cash equivalents, GAAP metrics to be approximately $190 million compared to $173.8 million at the end of 2017.

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 is from Dan Arias of Citigroup.

Tony it sounds like things are going pretty well at Spectrum. And to your point on back half strength versus 1Q and 2Q that's historically been the pattern for that business. But I do also think you were hoping to smooth that out a little bit. So can you just talk about how much of what you are seeing in 3Q is a step-up in demand for Spectrum products versus maybe just the sort of the inherent fluctuations within the quarters? And then given this, I mean, how do you see the cadence as we start thinking about next year for that business?

Sure. I think overall the, we have done a good job of smoothing out revenues through the 4 quarters. Clearly the -- historically Spectrum has been stronger in the second half of the year versus the first half of the year. We are going to see that again this year, but I think that the delta between H2 versus H1 won't be as great as what we've seen in the past. Overall, I think what we're seeing in the field is the ability to execute on the overall commercial strategy so we've integrated not only the Spectrum products, but also the Repligen products into the overall sales force. And we took that staged approach Dan, where it was sort of Asia in Q1, with Europe in Q2, we did North America in Q3. And I think that's really helped us. I said in my remarks that it's really the breadth and depth of applications that is driving a lot of growth. Historically Repligen has really relied on a -- on monoclonal antibodies as the main application. But I think with the Spectrum business we are playing in the world of vaccines. It's probably most revenue is coming from vaccines for Spectrum. We're also seeing some nice traction in gene therapy. We're also seeing nice traction in nanoparticles. So when I look to next year I think we're pretty confident that the business is going to grow in that 15% plus range for the foreseeable future.

And maybe just to the point on the forecast overall for the business, I'm wondering, can you compare current visibility to levels prior, maybe outside of the GE related stuff. I mean is your line up sight any different than it used to be now versus past periods as you have a rounded up portfolio and a more extensive conversation base so is it pretty similar? And it's just that the near-term looks pretty good?

Yes. We look at our direct portfolio. I think our near-term view, I think, if you look out over 1 or 2 quarters I think we have a really good sense of where the opportunities are. We had a -- we really had an exceptional quarter in Q3 in terms of the order load right across all our businesses. And so I think that gives us a lot of confidence about the year and obviously leading indicators going into next year are very positive.

If I can just sneak one more in for Jon. Jon, can you just remind us on how the collective gross margins on the new products that you're introducing are and ramping on in the next 6 months compares to the corporate average? I mean you have some interesting things going on there should that stuff be accretive to the aggregate?

Yes. So the -- I'll probably take that one. I think in general the new products that we've launched obviously OPUS 80 is probably going to be higher than the corporate average simply because we're not really taking any resin. We're not procuring any resins for those columns the customers are delivering the resins to us I think that's very positive. I think the Spectrum products that have been launched they're going to fall in line with the overall Spectrum margins, which are slightly above our overall corporate. And then the new controllers it's early stages yet, so I think it's going to fall right in the range of what our ATF business. So I don't think they're going to be better than what we have except for maybe OPUS 80 just simply because we're not doing the resin components, but I think they're in line with what we would expect for those businesses.

And I would add to that as well. The new Navigo [tied] protein in the NGL-impact A should be nicely in line with where we've achieved margins in the past.

The next question is from Brandon Couillard of Jefferies.

Tony, on OPUS 80 any early feedback you can share with us about the interest of that product? Any sense of a pull through in terms of other parts of the process development portfolio and perhaps a number of units you expect to ship for that product this year?

Yes. I think the number of units this year is going to be, it's definitely a small number. It ramps up very similar to what we saw with the OPUS 16. Normally, it's the second year after the launch that you start to see the volume beginning to pick up. So we're seeing nothing different with OPUS 80 than we saw with OPUS 60 or OPUS 45 a number of years ago. I think the big difference though Brandon is that people are viewing OPUS 80 as a validation that Repligen products can scale all the way through to Phase III or commercial. So having OPUS 80 in the portfolio has really opened up doors to companies that maybe in the past haven't really considered our pre-pack columns as a way they could scale with. And so we're really seeing a very nice pick up in demand for basically all the products really from 10 to 30 centimeters and 45s and 60s. And I think part of that is the fact that we can really talk about the whole portfolio and bring a customer all the way through in the non-mAb applications up into through to commercial and then mAbs through to Phase III. So I think that's where we're seeing the pickup.

Then one more, could you elaborate little bit on the strength in the proteins business in the quarter north of 20%. Do you feel like the underlying market can support something better than kind of the mid-single-digit growth outlook that you've been talking about for that OEM business and particularly how much visibility you have there?

Yes. I think we had a relatively easy comp year-on-year. So I think part of the growth in proteins and obviously the question is more related to ligands is really coming from the fact that Q3 last year was very light. And so I think it was a good quarter. I think as we look at the full year, we're beginning to have some visibility now into Q4. Q4 is lighter than averaging what we were expecting so we think at this stage it will be very similar to what we had a year ago. And overall I think the business is, proteins business is probably going to be relatively flat for the year. And we'll see obviously there's still a couple of months to go and we'll be able to update people a little bit more when we get into the February call.

The next question is from Paul Knight of Janney Montgomery and Scott.

The Protein A can you talk about, it was obviously a great quarter. It seems like we've resumed growth there. Is it -- where are we with the predictability of that product line?

Yes. I think similar to the commentary to Brandon. I think the challenge that we have, I think, with that business more than anything else is really around the lumpiness. And so if you look at 2017 it was first half strong, second half weak. This year we've had 3 solid quarters in a row with obviously tougher comps versus prior year, but obviously Q3 was an easier comp. As I said I think the Q4 is somewhat light, but we've a couple months to go and we'll see how that plays out. I think the more important thing for us is, we've put a strategy in place now for our proteins business. So all the work we did earlier in the year around securing a Navigo deal by putting the Purolite collaboration in play. I think that sets us up over the next 2 or 3 years that we're going to be able to get some significant growth coming from those investments that we've made.

And lastly, with the Purolite potential customers, I guess, doing runs. How long in your experiences does it take for that Purolite partnership to turn into revenue, Tony?

Yes. Definitely we'll see some revenue this year and definitely next year will be even more. But I think, when you look at it from the adoption cycle for Protein A resins, it's going to be a few years. So I would say it's really, we're really talking 2020-2021 before you can start to see some significant adoption. And part of this comes down to the success with the ligand and the success of resin in the marketplace. And as I said in my remarks, at least the early feedback is that the product is performing well and we'll see how it plays out over the next few years. Thank you.

The next question is from Matt Hewitt of Craig-Hallum Capital Group.

Just wanted to follow up on a couple of, I guess kind of, expand on the couple the earlier questions. First, given the strength that you seen this year and now raising the guidance again, how should we be thinking a little bit more towards the longer-term corporate growth targets? I think historically it's been 10% to 15%, but given all the investment and some of the tractions you're seeing with some of the newer products has that maybe gone up a little bit? Should we be thinking 12% to 17% or how should we be thinking about that longer-term?

Yes. I think in general obviously we're through 3 quarters this year. So there is still a fair amount of work to be done to get to the finish line in 2018. As I said a few minutes ago I think the leading indicators going into next year are very positive. I think long-term growth for Repligen is still that 10%, 15% organic. I will say that I think the investments we're making in new products should be able to drive it up to the mid to the high end of that range, but obviously there's a lot of work to be done to get us there. So I think if you look at our performance over the last few years, the markets were down considerably last year but we still performed quite -- very well. And I think again, this year, where the environment is very positive, I still think we're performing above where our peers are. So I think we're very, very positive about long-term growth for the company. But as I said a little bit more work to be done this year before we start to guide a little bit on 2019.

And then I guess kind of following up on the protein business a little bit. I realize there's some pleasant things last year, a weaker second half, or third quarter in particular. But as we look at that, I guess, the market more broadly would you say that market is fairly stable or are you seeing some pockets of growth that you may be could take advantage of over the next 3 to 5 years?

Yes, I think in general I definitely think the market is stable. I think we're really dealing with a pretty lumpy -- a lumpy business. I think there's a lot of inventory management that continues to go on. But overall I think it's a healthy market. I think, as I've said over the last -- over the last year, we fully expect this as GE brings their facility online that volume is going to move into that facility. And so as we look at our strategy for the future in terms of where we get increased volume, it's going to be coming from the collaborations we put in place. And obviously, the continued traction that we get with the customers we have today.

Our next question is from Tycho Peterson.

Tony, wondering if you could just spend a minute on Asia, you called it out a couple times in your prepared comments and I know this was a focus in the first quarter for Spectrum integration. So could you maybe just talk to some of the traction you're seeing there? How much is China versus other markets?

Yes, I would say that China, Korea and India are doing very well for us. And for sure the majority of the revenue that we're seeing is coming from our filtration portfolio. We've had really good traction with our ATF products with a number of customers doing the N-1 short-term perfusion. And obviously, a lot of the biosimilar processes are using the perfusion processes. So we've really benefited in China with ATF, Korea with ATF. And then when we look at our cassette business, the flat sheet cassette business having that broader sales force in Asia we've really benefited. And we remember when we acquired the TangenX business it was predominantly North America only. And to really have this broader sale force we've been really able to push that product into many applications in India, Korea and China. And then I think we're beginning to see -- we saw a nice pick up this quarter on our OPUS products. It's just been a little slower in terms of gaining overall tractions in those regions but we are making progress. But I would say the majority is coming from the broader sales force with the filtration portfolio in those 3 countries.

And then maybe just following up on one of the questions earlier on visibility, I mean as we think about vaccines and gene therapy and some of these newer markets, how shall we think about kind of current capacity supply-demand dynamics and what it really takes to penetrate these markets for you guys?

Yes, it's really being present, right, having the sales team calling on the right accounts, knowing exactly who they need to talk to. I think we're very -- we're in a really good position. If you look at our portfolio and you take something like gene therapy, probably the main application -- there's probably 2 parts of gene therapy where we have really good traction. One is on the plasmid side and the other is on the viral vector side. In the area of viral vectors, customers are typically working with viruses like AAV. They have to be purified so OPUS columns are being used there. They've also looked at using ATF in the -- in an N-1 application for viral vectors. And then our flat sheet cassettes and hollow fiber filters, some customers really like to use flat sheet cassettes for doing the concentration step and some people really like the advantages of hollow fiber. So we actually offer customers both options. And they don't really have to turn and go anywhere else to really solve whether it's a purification challenge or it's a filtration challenge. I think we're in really good shape.

Okay. Can I just --

Well, I'll add to that.

Go ahead.

You had asked about capacity. And we -- this year and going into next year we're investing in capacity on hollow fiber filtration as well as flat sheet with investments in our Rancho plant, as well as in our new Marlborough plant. So as we've done in the past, we're always looking a few years ahead to what the markets are going to be doing to make sure that we're well ahead of the game in terms of capacity. So we should be in great shape there. To answer the second part of your question.

And then just lastly on capital deployment, can you maybe just touch on M&A, how the funnel looks, how actively you're looking at additional fields?

Yes, I mean the M&A this year is probably no different than any other year in terms of the funnel. Continue talk to companies. Clearly our focus has been in the chromatography and filtration space, we continue to do that. And if something comes up, I think, we'll be -- we're definitely in a good position to be able to execute on it. So yes, we're active.

The next question is from Andrew Jones of Stephens Inc.

Tony, you talked about large pharma interests with single-use ATF. Is that something you're seeing the impact from yet or is that a kicker on kind of current trends for that segment?

Yes, I would say it's a kicker on current trends. I think ATF is a very interesting product line. I think when we acquired it from Refine back in 2014 they really had a handful of customers that were using the technology. And there was a general sense within the pharma community that small company, not sure we want to basically hook our wagon to a technology. But I think as we've moved forward and especially bringing out the single-use ATF portfolio that's made a massive difference in terms of customers willing to evaluate, it's simple to evaluate. And I think as some of the big pharma companies that have adopted ATF over the last 4 or 5 years as they present on that at conferences other pharma companies are really beginning to weigh in. So we're seeing definitely a pick up in interest within pharma in using perfusion based technology. Whether it's traditional long-term perfusion, or as I mentioned in our last earnings call, the short-term perfusion applications, are really beginning to gain some serious traction.

And then Jon, and I know innovation has become such a big part of the story here over the past few years. As we look beyond 2018, as you've reiterated your R&D spend guide for this year, is there any reason that should lit up 2019 and beyond or whether on an absolutely dollar basis or a percentage of revenue?

Yes, I mean we'll be coming out with our 2019 guidance in February. But I think the 1 thing that we can't say today is that we're highly committed to R&D and product development. And so you'll continue to see us spending in that area. But we'll give more specifics on our February call. But it is definitely an area that we're committed in. And we've seen it pay off in the past. And we would expect it to pay off for us in the future as well in terms of organic growth.

Andrew, 1 thing I would say on R&D, that's really important for us. We've made a number of acquisitions over the last 4 years. We have that opportunity now to reinvest. And that's essentially what we're doing. You can see what the outcome of reinvesting into the ATF business with single-use ATF. We're doing the same thing with Spectrum. We're doing that with TangenX. And so it's -- the key really is not to put too much on the R&D plate. We have to just pick the right products and make sure we stay focused on getting those 2 or 3 products every year that we launch into the marketplace. And really use that then to drive our overall organic growth for the company.

(Operator Instructions) Our next question is from Ram Selvaraju of H.C. Wainwright.

I just wanted to ask if, very quickly, I could get some background on the following housekeeping items? Firstly, what do you expect stock-based comp to evolve to, over the course of the remainder of this year? And do you expect that to stay at a similar level for the foreseeable future? Secondly, if you could walk me through the difference between the basic and the fully diluted share count? Thirdly, if you have any additional granularity you can give on how you expect R&D to trend going into 2019? And also I had a specific question relating to strategic M&A. Are you specifically looking at the possibility of working on other bioprocessing enzymes that are associated with the manufacture of recombinant proteins beyond Protein A at this point?

Yes. Maybe I'll take the last 2 questions and I will have Jon then cover the other ones. On strategic M&A that our strategy is all around bioprocessing. And as you probably know, with the Spectrum acquisition, we're much broader than monoclonal antibodies so we're in vaccines, we're in nanoparticles, we're in delivery systems that are used for drug delivery systems because they -- those particular particles have to be separated purified, filtered. And we're not specifically looking at bioprocessing enzymes but I can guarantee you that our products are being used in that area today. So I think, look, when we look at our strategy, when it comes to M&A, it really falls into 3 or 4 categories, right. We have to find something that really fits into what Repligen is doing today. It has to have the right gross margin, operating margins has to be accretive within a year of doing the deal. So we stay very true to those criteria. And so yes, look, bioprocessing enzymes clearly a lot of activity going on in that area. Not a specific focus right now but it doesn't mean that, if something came along that made sense that we wouldn't look at it. In terms of R&D, strategic R&D as I think we answered in the earlier questions and Jon I think gave the detail. The 8% of sales is a good proxy for where we should be spending on a go forward basis. And then I think Jon on the stock comp.

Yes. Sure. I can jump into the stock comp here. We don't expect any significant changes in the fourth quarter versus what we're seeing in Q2 and Q3. So that should be relatively consistent. We're not in position now to project what we're doing for '19. We'll advise of more information on our expenses as we go into our February call. In terms of the share count difference there's about a $2 million difference on a quarter-to-date basis between our basic and diluted. The real difference here is just a -- is largely outstanding shares that just have not vested yet. And that would could be in the form of RSUs much of our -- for our general employee base stock comp plan is tied to RSUs. And then there are some options for more senior level people that are account for some of that.

Then just 1 very quick another housekeeping item, when do you expect the Q to filed?

We should be filling today.

Ladies and gentlemen, this conclude the question-and-answer session. I would now like to turn the conference back over to you Tony Hunt for any closing comments.

Great. Thank you guys. And thanks everybody for joining us today. We'll look forward to catching up with everybody in February and bringing up to speed on how we finish out the year. And thanks again for joining the call today.

Thank you very much, sir. Ladies and gentlemen that concludes this conference call. And you may now disconnect your lines.