Repligen Corp (RGEN) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Repligen Corporation's Year-End and Fourth Quarter of 2018 Earnings Conference Call. My name is Carrie, and I will be your coordinator. (Operator Instructions) Please note this event is being recorded. (Operator Instruction]

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. Good morning. On today's call, we're reporting on financial results for the fourth quarter and fiscal year 2018, and we'll provide financial guidance for the year 2019. Repligen President and CEO, Tony Hunt, will cover our business highlights and progress; and our CFO, Jon Snodgres will provide a financial report.

As a reminder, the forward-looking statements that we make during this call, including statements regarding our business goals and expectations for the financial performance of the company are subject to risks and uncertainties that may cause actual events or results to differ. Additional information concerning 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're 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 and on sec.gov. The non-GAAP figures in today's report include 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, the company believes that the 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.

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

Thank you, Sondra. Good morning, everyone, and welcome to our 2018 year-end update. We are delighted with the way we closed out the year with organic growth for the quarter coming in at 25% and for the year at 17%. This above-average industry growth was fueled by strong execution by the Repligen team, as we launched new disruptive technologies, supported our customers in the field and scaled our operations to keep up with demand by the impact of a broader and deeper filtration and chromatography portfolio that is delivering flexible, high-impact solutions to our customers. And finally, by the underlying strength of the overall bioprocessing market, where there has been a clear increase in the number of drugs coming through the clinical pipeline, which has resulted in investments in capacity expansion and adoption of single-use solutions and outsourcing to CDMOs.

We believe we are well positioned to gain further market share as the industry continues to pivot towards flexible solutions and continuous processing. To manufacture the growing number of biological drugs, including promising new entrants in gene therapy. Before jumping into the quarter, I want to highlight some of the key accomplishments in 2018.

Starting with Spectrum. We focused on 3 main goals. Number one, we wanted to complete the commercial integration. We phased this in over the first half of 2018, creating one sales force focused on filtration and chromatography products. Number two, we wanted to achieve revenue synergies through cross-selling, new product introductions and regional execution. We delivered over $4 million in revenue synergies in 2018, with our flat sheet cassette business benefiting the most and Asia delivering a very strong year through their cross-selling efforts. And finally, number three, we wanted to focus on optimizing operations. Our East Coast and West Coast operations team worked together to implement lean-based manufacturing processes, and we're already seeing improvements in overall output. For the year, Spectrum products contributed close to $51 million in revenue, up 24% and surpassing the high end of our revenue guidance of $47 million to $50 million.

Moving now to strategic partnerships. We signed 3 strategic collaborative deals in 2018. We made significant investments in our proteins business, partnering with Navigo to develop a Repligen own portfolio of best-in-class affinity ligands. In June, we introduced our first next generation Protein A ligand from the Navigo collaboration, NGL-Impact A, and signed a deal with Purolite to supply this ligand for use in their Praesto Jetted A50 resin. Finally, we signed a deal with Sartorius Stedim to integrate our ATF controller technology into their single-use BIOSTAT bioreactor product line, which is expected to launch in early 2020.

Turning to our 2018 R&D initiatives. We increased our R&D spend to 8% of revenue as we pivoted towards internal innovation to fuel long-term organic growth with the goal of increasing the number of high-impact product launches on an annual basis. We launched OPUS 80R, NGL-Impact A, KONDUiT and early access to our ATF controller technology during the year. To meet increasing demands for our products, we invested in capacity and expanded our manufacturing footprint with the opening of our 64,000 square-foot Marlborough facility, focused on flat sheet cassettes and system manufacturing. We are now scaling up production in Marlborough and look forward to engaging customers at our new filtration center. Finally, we continue to scale our organization and restructured our customer facing team from a product-centric structure to a market-focused team, as we position the company for the next phase of growth. We now have 4 focus areas for the company: upstream perfusion and harvest clarification, downstream purification markets, ultrafiltration, diafiltration markets with a focus on hollow fibers and flat sheet cassettes, and finally, our chromatography infiltration systems team to support the businesses with integrated solutions and single-use flow path assemblies.

So moving now to Q4 results and full year 2018 performance. As reported today, we had a record quarter with $51.9 million in sales. The story of the quarter was the performance of our filtration and chromatography product lines, up greater than 30% organically. Infiltration, our ATF product line had a record quarter, up over 60% versus prior year. This acceleration in ATF sales came from platforming of ATF with large accounts, increased adoption of ATF in N-1 applications, increased adoption of ATF single-use solutions, which now represent 25% of our annual ATF revenues, and finally, an increase in the consumables run rate as the overall ATF install base expands.

Our SIUS flat sheet TFF cassette business also had a very strong quarter, up over 25%. The story here was around new accounts with key wins in gene therapy applications, increased demo activity and key customer attraction in Asia. We finished Q4 with a very strong order demand and expect a fast start to 2019 for this business. With the opening of our Marlborough facility, this business now has the capacity and infrastructure to expand over the next few years.

Finally, our Spectrum portfolio had a good quarter, up 14% to 15%, despite a difficult comp versus prior year. Sales were up 24% for the year on a pro forma basis, with very strong demand for our single-use flow path, KrosFlo Hollow Fiber modules and KrosFlo TFF Systems. We expect that our Spectrum business will have another strong year in 2019, and our overall filtration franchise will grow 20% to 25%.

Moving to chromatography, which is largely represented by our OPUS family of prepacked columns. Our OPUS business had a very strong quarter and year finishing up over 30% for the quarter and approximately 20% for the year. The story in the quarter was the impact of multisite adoption and new account activity. We are also seeing large pharma adopting OPUS at a faster rate with one of the top players endorsing the technology by putting our prepacked column products into a key commercial process. As with other product lines, we saw very strong order load going into 2019 with a significant number of columns on order and a step up in demand for OPUS 80R. We expect 2019 to be another strong year for our overall chromatography business, with revenue growth in the region of 20% to 25%.

In summary, our direct-to-customer product lines, infiltration and chromatography, continue to perform exceptionally well in the marketplace, and this is reflected in not only the strong performance throughout the year, but also in the continued strength and depth of the order load here in 2019.

Our OEM proteins business had a light quarter in Q4 and was flat for the full year. As mentioned earlier, we invested in the future of our proteins business in 2018 through strategic partnerships. In the near term, we expect this business in 2019 to be flat to down 5% with GE expected to transition to in-house manufacturing as part of their business continuity plan. We expect that NGL-Impact A ligand will gain early traction in the marketplace but 2019 revenues would be modest as customers adopt and implement the Purolite resins in early-stage clinical trials. As we move into 2019, our strategic priorities will center on the following: number one, we want to build out a systems team focused on TFF solutions to include both hollow fiber and flat sheet systems and consumables. Our goal here is to see the TFF market with best-in-class systems and technologies. Longer term, this team will build, partner and drive system solutions that will enable continuous manufacturing. Number two, we want to win share in perfusion and clarification in both traditional perfusion and fed-batch applications, with both our ATF technology and TFDF. Number three, we want to sustain our R&D investments to develop disruptive technologies across our 3 franchises. Number four, we want to implement capacity expansion and operating margin improvement programs. And finally, five, we want to continue to evaluate M&A opportunities to supplement organic growth.

In summary, 2018 was a remarkable year for the company, and we have strengthened our market position through a series of strategic moves and the development of disruptive technologies backed by a dedicated team, focused on delivering best-in-class products and services to our customers. We remain committed to bringing high-impact technologies and solutions to our bioprocessing customers, and we believe, we are well positioned to deliver another strong year of above-industry growth in 2019.

Before concluding, I wish to recognize our employees around the globe, who have worked diligently to integrate Spectrum, build out capacity, deliver high-quality products on time and sell and support our products in the field. Their commitment and professionalism was exemplary in 2018. And I have every confidence in our team to continue to perform at the highest levels. I also want to thank our loyal shareholders and customers for their parts in Repligen's success as a best-in-class bioprocessing technology company and a trusted partner.

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're reporting our financial results for the fourth quarter and full year 2018 as well as providing our financial guidance for the year 2019. 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 both the fourth quarter and full year 2018. We had a record quarter and year with revenues of $51.9 million for Q4 and $194 million for the full year. Our organic revenue grew in the fourth quarter by 25% with adjusted operating income up 31% year-over-year. For full year 2018, our organic revenue grew by 17%, with adjusted operating income up 25%. Of our 37% reported revenue growth for the year, 20% was attributed to our 2017 acquisition of Spectrum, and we saw less than 0.5 point of tailwind from foreign exchange.

Operationally, we continue to make disciplined investments, from increased R&D spend to bring new products to market, to effective capital deployment, to increase capacity and bring new facilities online, including the associated systems to support our larger, rapidly growing organization.

Now to provide more color on our overall financial performance. As Tony mentioned earlier, our direct-to-customer filtration and chromatography franchises continued to perform well. Our direct products represented approximately 79% of the company's total revenue in the fourth quarter and about 72% for the full year. Direct revenue growth during the fourth quarter was strongest in Asia and North America, up over 47% and 38% respectively. For the full year, on a pro forma basis, all 3 of our regions grew north of 25%. For the full year of 2018, direct products in Asia, Europe and North America accounted for approximately 16%, 29% and 55% of sales, respectively.

Now moving to our income statement. Fourth quarter adjusted gross profit was $29.1 million, representing an increase of $5.3 million or 22% over the fourth quarter of 2017. Our adjusted gross margin was 55.9% for the fourth quarter of 2018 compared to 57.1% for the same period in 2017. Full Year 2018 adjusted gross profit of $108.8 million reflects an increase of $30.2 million or 38% compared to the full year of 2017. Adjusted gross margin was 56.1% for full year of 2018, compared to 57 -- 55.7% for 2017 with our 40 basis point improvement driven by volume leverage, partially offset by product mix and increased costs related to our new filtration center of excellence in Marlborough.

With respect to operating expenses, research and development expenses for the fourth quarter of 2018 were $3.1 million on a GAAP basis, consistent with the 2017 period. For the full year of 2018, GAAP R&D expenses were $15.8 million, compared to $8.7 million in 2017. Key drivers of the year-over-year increase were the 2017 timing of Spectrum acquisition, investments in our new ligands programs with Navigo as well as investments in our next generation ATF controllers and other filtration products. Overall R&D expenses finished the year at 8% of revenue, reflecting our commitment to investing in innovation and new product development. Adjusted SG&A for the fourth quarter of 2018 was $14.9 million, compared to $12.3 million for the fourth quarter of 2017. Full year adjusted SG&A was $53.8 million in 2018, compared to $38.5 million in 2017. Roughly half of the year-over-year increase in SG&A was related to the timing of our Spectrum acquisition and the remainder was 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 fourth quarter 2018, our adjusted operating income was $11.1 million, a 31% increase compared to $8.5 million reported in the fourth quarter of 2017. Our adjusted operating margin was 21.3%, a 100 basis point improvement compared to 20.3% for the fourth quarter of 2017. For the full year of 2018, our adjusted operating income was $39.4 million, a 25% increase compared to $31.6 million for the full year 2017. Our 2018 full year adjusted operating margin was 20.3% compared to 22.3% for the 2017 period, reflecting our increased investments in ligands, in commercial and in Spectrum integration. Adjusted net income for the fourth quarter of 2018 was $9.8 million, an increase of 12% compared to $8.7 million in the same period in 2017. Full year 2018 adjusted net income was $33.3 million, an increase of 23% compared to $27.2 million for full year 2017.

Adjusted EPS for the fourth quarter of 2018 increased to $0.21 per fully diluted share from $0.20 for the fourth quarter of 2017. For the full year 2018, adjusted EPS increased from -- increased to $0.73 from $0.69 for 2017. As a reminder, the company had a significant tax benefit for the full year of 2017, which resulted in an effective adjusted tax rate of 5.5%. This compares to 14.8% in 2018.

Our cash and cash equivalents, which are GAAP metrics, were $193.8 million at December 31, 2018, reflecting cash generation of $20 million. For full year 2018, we generated free cash flow of $16.5 million, inclusive of $30.6 million of operating cash flow, less $14.1 million of capital investments, primarily related to our new Marlborough facility and SAP.

Now moving to 2019 full-year guidance. Our GAAP to non-GAAP reconciliations for our 2019 financial guidance are included in the reconciliation tables in today's earnings press release. As previously mentioned, unless otherwise noted, all 2019 financial guidance discussed will be non-GAAP. Please also keep in mind that our 2019 guidance may be impacted by fluctuations in foreign exchange rates beyond our current projection of a 1% headwind on sales and does not include the potential impact of new acquisitions. Today, we are setting our 2019 full year revenue guidance, a GAAP metric, at $218 million to $225 million, reflecting growth in the range of 12% to 16% as reported and 13% to 17% on an organic basis. Within these growth projections, we expect our direct-to-customer filtration and chromatography businesses to grow at 20% to 25%, and our OEM proteins business to be flat to minus 5%.

Our adjusted gross margin guidance for 2019 is 56% to 57%, with expected improvements coming from volume leverage on our factories, increased OPUS margins and from continuing benefits of our material sourcing activities, all offsetting higher costs from the startup of our new Marlborough facility and continued investments to support capacity expansion. Adjusted operating income is expected to be in the range of $48 million to $51 million, and our adjusted operating margin guidance is 22% to 23% of revenue. We are expecting 2019 adjusted income tax expense of approximately 19% to 20% of adjusted pretax income. We're expecting full year 2019 adjusted net income in the range of $38 million to $40 million for the year, and adjusted EPS in the range of $0.81 to $0.86 per fully diluted share. Adjusted EBITDA is expected to be in the range of $57 million to $59 million for the year of 2019 with depreciation expenses to be approximately $7.5 million and intangible amortization expenses to be $10.5 million. The company expects to invest an estimated $14 million in 2019 for capital expenditures. Major investments include $5 million in costs related to the completion of Phase I of our global ERP implementation and $3 million for the build-out of large-scale OPUS manufacturing in our Ravensbrück, Germany facility. We expect 2019 year-end cash and cash equivalents, a GAAP metric, to be in the range of $220 million to $225 million, with our CapEx investments being funded by cash generation from our operations.

In closing, 2018 was another year of excellent performance for the company. We look forward to executing on our 2019 goals and reporting on our progress 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) The first question will come from Tycho Peterson of JPMorgan.

This is Julia on for Tycho today. So to start off maybe regarding protein, you said your 2019 outlook is flat to down 5%. Could you maybe break down the moving pieces between the GE transitioning in-house versus the growth factor, which was the other 1/3 of the protein business? And just regarding the fee transition. Is that just moving in ahead of the contract expiration at year-end or does that, sort of, imply a smaller headwind as we look to 2020?

Sure. On the GE -- well on the proteins front in general, we've now had 3 years in a row of the proteins business being essentially flat, right? So when you look at -- when we look at 2019, we're expecting a strong first half of the year for proteins and just like 2018, we expect the second half of the year to be lighter. When you look at the difference between ligands and growth factors, I think you'll see both ligands and growth factors growing quite strongly in the first half of the year. We expect growth factors to have some reasonable growth in the year. Ligands will be -- expect within that portfolio to be down, that's what we've seen over the last couple of years, we don't think 2019 is going to be any different. The GE, clearly, will transition to their manufacturing by the end of the year and then in 2020, obviously, start to move whatever percent of manufacturing that they want to move across into their facility. But from 2020 on, we expect at least 50% of their volume on a go-forward basis.

Okay, that's helpful. And then on the filtration side, obviously, you're expecting TangenX and TFDF to both ramp this year. So how much revenue expectation -- contribution do you expect exactly? And besides the commercial focus, obviously, what are -- are there any other sort of key drivers for the products to ramp?

Yes, I think the real way to look at it is the total filtration portfolio. If you look at ATF, just a tremendous year last year, Spectrum had a great year, the TangenX flat sheet cassette business had a great year. We're now moving into 2019. As I said in my remarks, we had a very strong start to the year in terms of the order load. We have some great products that are coming through that I think will further stimulate demand for our filtration portfolio, whether it's the ATF controllers, whether it's the single-use ATF-1 products that we'll launch for the smaller-scale customers to the TFDF technology that we will have basically, bridging between perfusion and clarification. So we're excited about that and then on top of that, we're really focusing on building out our systems team. We brought people on board in Q4. We're expecting to launch a series of TFF systems by second half of this year that again will be a stimulus for the overall filtration business.

Got it. And lastly, from me, regarding capacity. Could you maybe give us an update on your current capacity utilization in light of all the growth investment? How do you expect it to ramp? And how much further investment are you expecting to get to the ideal lead time that you're targeting? And in light of that, how should we think about the path to gross margin expansion beyond 2019?

Yes, so let me -- I'll handled the -- I'll go through the capacity questions. I'll let Jon handle the gross margin piece. But in general, we've been really diligent about investment in capacity over the last couple of years. If you go back a few years ago, every time we see a -- we make a move in terms of building out our commercial organization, it usually takes about 6 months and then we see an uptick in demand. That's exactly what we saw in 2018 as we integrated the 2 commercial teams. Knowing that what was coming, we've really been very focused in 2018 on building out capacity. So getting the Marlborough facility up and running adds tremendous amount of capacity for us for not only the cassette business, it allows us to build out our systems portfolio. We've been able to alleviate some of the bottlenecks out in Rancho for the Spectrum business by bringing basically Marlborough online. The area where we're continuing to look at capacity expansion is on our prepacked column side. We made the decision 2 years ago to go and build out 7 production suites. That was a smart move because we're seeing a fairly significant uptick in demand for OPUS products. We've also pulled -- made the decision at the end of last year that we're building out the Ravensbrück facility for large-scale OPUS. So by the end of this year, we'll have large-scale OPUS manufacturing in Europe, which will really help to serve our European customers. So across the board, I think, we're in good shape on capacity. I think the pieces that we really have to look at right now is just the manpower piece. So in some -- for some product lines, we'll be adding things like second shift, but it's more a people thing than it is needing more space to build products. So hopefully, that gives you a good overview of where we are in capacity. And I'll turn it to Jon to talk about gross margins.

Sure. Hi Julia. On gross margin, we finished the year at 56.1%, which represented about 0.4 point of improvement versus 2017. And as we guided into 2018, we're guiding in the 56% to 57% range, and so we think we'll be able to inch upward a bit from 2018 into -- more towards the middle of that range this year. The key drivers that we see internally are really the volume leverage that we're seeing. Obviously, continued work in our OPUS mix and the resin column mix there, continued leverage of our global sourcing programs where we're seeing reduced costs and then lean initiatives is one of them, Tony mentioned, was bringing in the second shift to get more volume through our existing facilities. So those are some of the improvement opportunities that we're working. As an offset, we're also seeing that -- obviously, when we take Marlborough live here in Q1, we'll start having the depreciation effect on our business, and so that will be a partial offset to our improvement opportunities that we're working on. I think overall, as you look, our longer-range goal is 60%. We believe through the work that we're doing internally plus additional M&A activities longer term that we have the opportunity to still continue to work towards that 60% margin range.

The next question will come from Dan Arias of Citigroup.

Tony, gene therapy sounds like it's kind of ticking up a bit in terms of importance these days. Can you just talk about the ramp there and the expectations that you might have for 2019 and 2020? I mean, obviously, that's a nascent field, but there are a bunch of interesting things going on, and it sounds like you're tapping into at least some of that. So I'm just curious about your level of enthusiasm there for the near term or the midterm?

Yes, we're really enthusiastic about it, Dan, and part of the reason is, obviously, here in the Northeast, there is quite a concentration of gene therapy companies. You know when we look at our portfolio and especially, as we began to pay a lot more attention to gene therapy over the last, say, 12 to 18 months, we were seeing demand for our prepacked columns, we're seeing demand for our flat sheet cassettes, we're seeing demand for our hollow fiber cartridges and our KrosFlo systems. So a significant portion of our portfolio of products can be applied right into the workflow. A lot of what we're working on is on the virus side, and so we have a really good -- I think, good traction at many of the top accounts in the world of gene therapy, and we expect that it will be a good contributor to overall revenue and overall revenue growth for us for the foreseeable future.

Okay. And then may be on Spectrum. What do you think your 2 synergies look like there? I mean, I'm sure it gets a bit harder to tell, but just coming off the $2 million to $3 million that you set out to do this year and then doing $4 million, do you have a target for 2019? And do think that it's like a similar mix between what comes out of cross-selling versus just an expanded geographic reach?

Yes, so overall our target for this year is about $5 million to $7 million. We absolutely believe we're tracking towards our initial -- original goal of $15 million to $20 million. I think when we get towards the end of this year, we'll have a better sense of where we are going to be in that overall range. Well, we feel really good about the portfolio, the integration of the sales team has gone really well. The opportunities for sure -- in 2018, we saw a lot of opportunities coming out of Asia, our flat sheet cassette business really benefited from overall sort of revenue synergies and the cross-selling activities. I think you're right, it does become a little bit more challenging as we sort of add more salespeople and integrate the teams, but when you look at the overall Spectrum portfolio and the types of applications that the products are used in today, I think we feel really bullish about the business and our ability to hit the revenue synergy targets.

And Dan, that $5 million to $7 million is baked into our 20% to 25% filtration growth number for 2019.

Yes. Okay, Jon. Maybe if could just one more. Tony, you've been pretty upfront about wanting to build out the portfolio further and Jon touched on M&A. How are you thinking about M&A opportunities in 2019? And where do you think you might be most likely to see an addition?

Yes, so overall, obviously, our blueprint for how we've gotten to where we are today is a combination of organic growth, internal innovation and M&A and that hasn't changed. We're clearly, in 2018, active in the M&A front, looking at potential targets. When the right target comes along, obviously, we feel like we're in a good position to execute on that. We feel that the overall strengths that we're seeing in filtration and chromatography, that's probably going to be the focus areas for us going forward. So expect over the next few years, we're going to continue to be active on the M&A front.

The next question will come from Drew Jones of Stephens Inc.

Tony, maybe could you expand on what exactly the field operation and field service team additions, what they're doing, kind of, benefit to the customer? And is there potential there from those guys to impact the top line?

Yes, so on the field service, so 2 types of groups. One is the field service team, the other one is the field applications team. The applications team really assists the sales team in terms of doing demos and really working very closely with the customers. They implement any of our technologies. And for the most part, they're on the filtration side. The service business is something that we've been focused on for the last couple of years. We really built out that team. Initially, they had focused on ATF as really the main product line where we were offering service and service contracts on. But with the acquisition of Spectrum, what we've been doing over the last, say, 12 to 15 months is really looking at the Spectrum portfolio and putting together service plans, especially around their bench to process scale and production scale, TFF systems. So we think that it's still small in the grand scheme of things. It's low millions of dollars in terms of revenue that's coming in from service, but it's growing and it's growing rapidly, and we think it's an important sort of leg on the stool for us to continue to build out because there is demand from our customers and as you sell more systems and products, whether it's ATF or it's TFDF or it's KR2i's or it's the large-scale TFF systems, that service is required, and it's something that we need to continue to focus on.

Okay. And then Tony, you called out OPUS and getting into a key commercial process. What does that tell us in terms of how we should be thinking about the opportunity for OPUS? Previously, we kind of thought it was more limited to maybe small or midsized processes. Is this a signal that may be we're moving upscale a little bit?

Yes, I think the way to look at it is, we've really rounded out the portfolio by bringing the OPUS 80R to market and what that has done is really opened up opportunities, probably outside monoclonal antibodies to get into commercial processes because when you think about recombinant proteins, some vaccines, basically drugs that are manufactured at a smaller scale, the 60-centimeter, 80-centimeter columns are very appropriate for late stage and commercial manufacturing. So we're definitely seeing a benefit from that. I think, I've said previously that one of the real advantages of getting OPUS 80 out was, customers now see that we have the complete portfolio, so people who are on the fence about using OPUS, now have a path forward to getting to commercial or at least late stage. And I think we're benefiting from that. I think the other thing we're benefiting on the OPUS side is, is honestly the integration of our sales force and one of things we did in Q4, Drew, was we started to bring on a couple of specialists now. We have specialists infiltration, up until really Q4, we hadn't really put specialists in the field or prepacked columns. We're doing that now with a focus on the large pharma customers. We think that's going to pay off for us over the next few years.

And then last one for me. You called out ATF going platform with a few key accounts. Can you maybe give us a little more color on where in the process it's being used. Is it more disposable that's getting the traction there? Any color would be helpful.

I think it's a bit of both, right? Because our single-use ATF represents about 25% now of our ATF sales, so 75% is still the stainless steel portfolio. Clearly, we have customers and had customers now for the last 6 years that are using ATF in late stage commercial processes. So we continue to see very good traction with that install base and so as those customers have put ATF into commercial processes and other processes are coming through, they've put ATF into those manufacturing workflows as well. What's happened, I think over the last 18 months, is really the benefit of getting the single-use products out. So customers who were -- had sort of stayed away from using ATF technology because they didn't have an autoclave or didn't want to deal with stainless steel, we're saying really nice traction on single-use and this year, we'll start to see our single-use products end up being late stage clinical potentially commercial processes. So very excited about that portfolio and really seeing 60% growth in ATF in Q4 was a very, very positive leading indicator of what we think this technology can do on a go-forward basis.

The next question will come from Paul Knight of Janney Montgomery Scott.

Tony, could you talk about perfusion. You mentioned it as one of your goals. I mean, perfusion is what percent of the market today? And how quickly do you think perfusion is growing as a practice in biological production?

Yes, great question. So if you go back, Paul, a few years ago, I think the split was probably 80% fed-batch, 20% perfusion. I think over the last few years, I think most people would say that perfusion's moved up to 25% of the overall market, but what's more important is that the technology that's being used in perfusion is now getting applied into the -- 75% of the market, which is fed-batch. So we're seeing fed-batch customers using perfusion in the seed train, which is how do you build up your -- basically, your concentration of cells as you go from small bioreactors all the way up to the production bioreactors. So we're seeing implementation of ATF in our perfusion portfolio in the seed train. So that's really opened up the fed-batch customer base for us. And then with some of the applications work that our R&D team has done, which we refer to as high productivity harvest, that's really allowing fed-batch customers to use perfusion principles for a few days on a fed-batch bioreactor. And again, that's opening up more opportunities for us. So we haven't really seen the full benefit of high-productivity harvest, but we're definitely seeing the benefit of fed-batch customers using perfusion and N-1.

Okay. And then on OPUS. I know that homebrew has been the biggest market opportunity. You seem to have captured more and more homebrew. How much of that market do you believe is left? Is it $200 million left? Is it $150 million to $200 million? Could you kind of frame it up a bit?

Yes. I think when you look at the market, we're probably -- we haven't really gone and rerun the calculations as we finished off 2018. But probably 40% of the market is probably using prepacked columns today, but still 60% of the market that's not. I think the big part of the market that hasn't quite moved over into prepacked is the large biotech. The overall biotech industry, in general, large biotech, large pharma. I think as those guys begin to make that transition, and we're seeing that happening, that's where we're going to see the next sort of growth phase for prepacked columns.

The next question will come from John Kreger of William Blair.

Can you talk a little bit about the puts and takes to organic revenue growth as you think about this year. You obviously ended '18 very strong, and it sounds like the order flow has started '19 off well too. What do you expect to decelerate as you go through the year? Is it just the protein OEM business or something else?

Yes. Great question, John. So if you look at 2019, I think overall, we expect that the first half of 2019 is probably going to be stronger than the second half. So a little different than what we saw last year. If you look at the 3 main franchises that we have, filtration, chromatography and proteins, we expect that the filtration and chromatography portfolios are going to be fairly evenly split across all 4 quarters. And we expect that the proteins business is going to be stronger in the first half versus the second half. So probably the change -- the only change we would see between H1 and H2 is a lighter proteins business in H2.

Great. And then, Tony, have you baked in a contribution from any new product introductions in your thinking for '19?

We tend to be conservative on the new product introductions. Most of what we're looking at this year is going to come out probably Q2 through the end of Q3. So there's probably some upside from new product introductions. The challenge with new product introductions is typically you go through a seeding phase in our industry for sort of 6 to 12 months. So we're excited. I think we'll see for sure an impact from getting our ATF controller technology out and that's absolutely baked into our ATF and filtration numbers. But when you look at TFDF technology and you look at the lab scale to production scale systems that we're going to bring to market in the second half of the year, we don't -- we haven't really baked in much revenue from those products.

Great. And then one last one. From a longer-term perspective, is there a point where you think the protein business can start growing again, given some of the recent partnerships? Or should we assume that continues to decline over time?

Yes, I think a little bit -- there's a little unknown in it simply because we know that starting next year, GE will -- can reduce the overall demand down to 50%. So depending on how fast that ramps, that's probably going to determine a little bit what the overall growth, whether it's positive or negative for the proteins business. So I think from looking at that business, I definitely wouldn't have it growing. I would have it flat for now to down 5%. And I think as we finish off 2019, we'll have a better sense of where we're going to be in 2020 and 2021. And obviously, the Purolite, the NGL-Impact A ligand and some of the other affinity ligands that we're work on, will start to hit the market. So we'll hopefully pick up some revenue and offset some of the declines that we will obviously see from the GE relationship.

The next question will come from Matt Hewitt of Craig-Hallum.

First one, the TFF, the systems team that you're putting together, how long do you think it'll take for them to -- I guess, to get a product or products ready for market? Is that more of a 2020 revenue event or maybe even a little longer term? Just maybe how should we think about that?

No, I think for sure we'll see products brought to market this year, from second half of the year. Obviously, not going to have a big revenue impact in 2019, but for sure, in 2020. We are completely committed to building out the systems business. If you think through what I spoke about in my prepared remarks, it's really important for the company to pivot away from a product-centric organization to a market applications organization. That also breaks down a lot of the silos around deals that we've done, and we now have our organization and company focused on whether it's perfusion or clarification or it's purification. And we felt like it was really important to have a dedicated systems team that would serve those 3 other businesses and start to build out integrated systems with single-use flow path, all the things that our industry needs. And we're doing a lot of work already on the consumables side, and we think it makes a lot of sense for us to have systems wrapped around our consumables.

Okay, makes sense. And then I guess a couple other questions. Number one, so you exited the year, I think you said around 72% of your business is now coming from direct. Where do you see that kind of shaking out at the end of '19? Is there a point where you kind of maxed out the direct side of things, given some of your partnerships and other relationships? Or is that eventually going to become closer to 100% of your business will be direct?

Yes. No, no, I think our direct business is marching towards an 80-20 split between direct and proteins. I think that's probably a good place for Repligen as a company. We've been 4 years ago -- 4, 5 years ago, we were 80% OEM and 20% direct, so over the last 4, 5 years, we've made that transformation. And I think by the end of this year -- I think you saw it in Q4 with the numbers that Jon spoke about, it was almost 80% of our revenue. In Q4, it was coming from direct. We expect that, that's going to be, where it will be in the future. We don't expect that our proteins business is going to go down to less than 5% of overall revenue. We expect it's going to be in that 10% to 20% range on a go-forward basis.

And I think, you can expect an acceleration of a few percentage points a year, as we move forward.

Okay. Okay, great. And then one last one for me. Single-use ATF, obviously, you've seen strong demand there over the past couple of years. You've gone from 15% to 25%. Where do you see that exiting 2019? And I think that will wrap it up for me.

Yes. I think overall single-use ATF is going to continue to add 5% to 10% on -- so instead of being 25% of total revenue for ATF in 2018, we'll expect it to be in that 30% to 35% of revenue in 2019 of ATF.

The next question will come from Steve Schwartz of First Analysis.

In Jon's prepared remarks, you talked a bit about the step up in SG&A spending. And if I look at your 2019 guidance, it looks like operating income is going to see some leverage off the revenue growth. And even if I back out the gross margin expansion, it looks like you'll get some leverage off of SG&A in 2019. Can you talk a little bit about what's happening there to -- in the elements to that? Is it strictly leverage off the personnel or other factors?

Yes, you bet. Happy to do so. Well, we finished the year with adjusted operating margin in 2018 at 20.3% for the overall company and as we mentioned earlier, we guided to 22% to 23%. So that implies about 170 basis point expansion to get to the low end of that range. And so it's going to come from a few different areas. First of all, we talked a little bit earlier on gross margin. We expect that we can grab a 30, 40 basis points hopefully of gross margin this year, which will help obviously expand the overall operating margin. In addition, we do expect to continue to spend on R&D up in that 7% to 8% range, so we're not going to really reduce significantly the R&D spend. We want to continue to grow that to bring out new innovation and new products to the market. But on the SG&A side, we've continued to build out the commercial teams. We've continued to build out field applications and field service, along with our infrastructure, but there is where's some more additional leverage should come from overall as we move forward.

Okay. So...

And Steve -- the investments, Steve, we made last year, especially on the commercial side, I think we're going to get a benefit in 2019 from that. So prior to 2018, our commercial teams really worked in silos, right? Spectrum's team focused on Spectrum products, Repligen legacy -- focused on Repligen legacy products. We've integrated those teams. We're definitely seeing the benefit of having one sales team, and I think that's where we're going to see some significant leverage this year.

Right. And I think we're going to -- obviously, going to continue to make disciplined investments where they make sense and so we're obviously focused on the long-range effects of organic growth for the company. So we'll continue to make sure that we're supporting that as we look forward.

Yes, certainly. It looks like op income could grow greater than 20% on a 14% organic revenue growth, so there is some nice leverage coming there in 2019. With respect to service revenue, you don't specifically break this out, but certainly with the growth in prepack columns and what have you, is there a discernible element of service revenue? And is it changing significantly? Is it something under the surface that maybe we should be aware of?

I don't think so, Steve. I think most of the service revenue is definitely going to come from the filtration portfolio. There's not a whole lot that you can offer around service -- around the prepack column piece. Essentially the column arrives, ready to be used, it just needs to get hooked up. It's not like a filtration system whether it's ATF or TFF skids where you have to do IQ, OQ, PQ service contracts on the system on an annual basis. So I think it's going to be more filtration.

Okay. And then my last question. Tony, when you went through the 5 strategic focus points and you noted disruptive technology development. I understand there's a bit of a Skunk Works element to this where you can't talk in great detail about it, but if you could provide us some color on maybe the arenas where you're seeing those opportunities and what might be there for you?

Yes, I think in general the -- every R&D portfolio has a balance of derivative products and disruptive products. We think that for -- we've been very successful as a company because we've been able to get high-impact products launches into the marketplace, whether it's OPUS, whether it's ATF technology, whether it's the hollow fiber TFF systems with the single-use flow paths, all of those have been very successful in the marketplace. So when I look at the R&D portfolio, things that I've put in the range of disruptive technologies, NGL-Impact A ligand is definitely a disruptive technology because of its performance and obviously, we'll see how that plays out with the Purolite resin over the next few years, where we believe that ATF controllers, even though it doesn't sound like it's a big deal, it is a big deal, it's going to be really beneficial for our customers. We really like the TFDF technology that Spectrum developed over the last few years and expect to see that in the marketplace later this year. So they are the types of examples of products that we see that will have an impact. I suppose impact in the marketplace is probably the more appropriate word than disruptive, but that's where we're going.

Okay. But certainly things that are close within your wheelhouse of what you worked on?

Absolutely, yes. Yes.

And the next question will come from Edward Marks of H.C. Wainwright.

This is Edward on for Ram Selvaraju. Just a few questions here. If you look towards the gene therapy sector, I was wondering if you could highlight a couple of the most significant competitors that you're currently seeing.

I think almost everybody in our -- in the bioprocessing space is focused on gene therapy, whether it's GE, or Thermo, or Sartorius, or Pall, or Millipore, everybody has a portfolio of products that they feel can be used and applied into the gene therapy space. We've just focused on the products we have, which is really our OPUS prepack columns, our flat sheet cassettes and our hollow fiber products and that's what our sales team is focusing on. And honestly, because we have very good relationships and those products have been proven in the monoclonal antibody space, I think we've been able to get -- port that over to gene therapy in a fairly easy way. So everybody in the -- in our space is definitely competing and all our competitors are also focused on gene therapy, so should -- no surprise.

Okay. And just a couple of finance questions. What percentage of the revenue base currently consists of the direct sales-based products?

Yes. So we announced that in our script. In Q4, our direct products represented about 79% of our sales. And for the full year 2018, our direct products represented about 72% of our total sales. And of course, as Tony mentioned earlier, our target there is 80% over the next few years.

Right. And then I was hoping you could provide a little additional clarification on the bridge from 2019 revenue guidance around the $225 million range up to the $400 million to $500 million range that you've projected by 2023?

Sure. I mean, if you look at where we are right now, we expect -- we've always said that the company is going to grow organically at 10% to 15%. We believe we can grow at the high end of that range through increased investment in R&D and getting these high-impact products into the marketplace, so we're still very confident about that. Obviously, if you get to that $400 million to $500 million involves M&A, that's how we got to -- back in 2015 we set a target for the company to be between $200 million and $250 million by 2020. You can clearly see that in 2019, we're actually hitting that range. We feel like the blueprint that got us to where we are today is the same blueprint that's going to get us to the $400 million to $500 million by 2023. So it'll involve the M&A.

Okay. And then a final clarifying question. Did I hear correctly that the launch timing for the XCell ATF controller is going to be in 2020?

No. It'll be here in 2019.

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

Well, I'd just like to thank everybody for joining us today. Look forward to getting back on in May, and bringing you up to speed on how we're doing in Q1 first half of the year. So thank you, everyone.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.