U.S. Markets open in 3 hrs 29 mins

Edited Transcript of RGEN earnings conference call or presentation 31-Oct-19 12:30pm GMT

Q3 2019 Repligen Corp Earnings Call

WALTHAM Nov 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Repligen Corp earnings conference call or presentation Thursday, October 31, 2019 at 12:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Anthony J. Hunt

Repligen Corporation - CEO, President, Director & Member of Scientific Advisory Board

* Jon K. Snodgres

Repligen Corporation - CFO & Secretary

* Sondra S. Newman

Repligen Corporation - Senior Director of IR

================================================================================

Conference Call Participants

================================================================================

* Edward D. Marks

H.C. Wainwright & Co, LLC, Research Division - Research Analyst

* Eleni Maria Apostolatos

JP Morgan Chase & Co, Research Division - Research Analyst

* Jacob K. Johnson

Stephens Inc., Research Division - Analyst

* Jonathan Marley Kaufman

William Blair & Company L.L.C., Research Division - Associate

* Joseph P. Munda

First Analysis Corporation - VP

* Matthew Gregory Hewitt

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Paul Richard Knight

Janney Montgomery Scott LLC, Research Division - MD, Head of Healthcare Research & Senior Equity Research Analyst

* Puneet Souda

SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen, and welcome to Repligen Corporation's Third Quarter of 2019 Earnings Conference Call. My name is Francesca, and I will be your coordinator. (Operator Instructions) This event is being recorded. (Operator Instructions)

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

--------------------------------------------------------------------------------

Sondra S. Newman, Repligen Corporation - Senior Director of IR [2]

--------------------------------------------------------------------------------

Great. Thank you, Francesca. Good morning, everyone. Thank you for joining our call. Today, we'll cover the financial results and business highlights for Repligen's third fiscal quarter and first 9 months of 2019, and we'll provide an update to our full year guidance.

President and CEO, Tony Hunt, will cover business updates; then our CFO, Jon Snodgres, will cover our financial results and guidance.

As a reminder, the forward-looking statements that we make during this call, including those 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 SEC. Today's comments reflect our 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 are 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 our website and on sec.gov. The non-GAAP figures in today's report include the following: revenue growth at constant currency; gross profit and gross margin; operating expenses, including R&D and SG&A; operating income and operating margin; income tax expense; net income and earnings per share; as well as EBITDA and adjusted EBITDA. These adjusted financial measures should not be viewed as an alternative to GAAP measures but are intended to better enable investors to benchmark Repligen's current results against historical performance and the performance of peers.

Now I will turn the call over to Tony Hunt.

--------------------------------------------------------------------------------

Anthony J. Hunt, Repligen Corporation - CEO, President, Director & Member of Scientific Advisory Board [3]

--------------------------------------------------------------------------------

Thank you, Sondra, and good morning, everyone, and welcome to our Q3 earnings call. 2019 continues to be a very positive year for Repligen driven by the strength in our 3 main franchises in proteins, filtration and chromatography and strong market demand for monoclonal antibody vaccine and gene therapy customers.

Highlighting this strength, our direct businesses grew more than 40% organically in the quarter, and we remain well positioned for an excellent finish to the year. Today, we are raising our full year revenue guidance to $267 million to $270 million. This reflects overall growth of 38% to 39%, including 7 months ownership of C Technologies and organic growth greater than 30% for the full year.

Strategically, Q3 was all about integrating C Technologies; executing on our long-term manufacturing capacity plans for our filtration and chromatography product lines; completing Phase 1 of SAP implementation; and finally, moving key R&D programs through the development funnel and into the marketplace.

With respect to C Technologies, we have hired the majority of the commercial team who will be onboarded here in quarter 4, giving our new process analytics franchise a direct presence in Europe, India and Korea and a stronger presence in North America. In Japan and China, we will use a combination of current direct sales and key C Tech distributors given the excellent work done by these distributors in these countries.

In Q3, C Technologies delivered approximately $7 million in revenue and is on track to hit our target of $16 million to $17 million for the partial year.

Within the product portfolio, we are seeing steady strength in sales of SoloVPE, along with growing interest in the FlowVPE technology, from customers who are excited by the potential to implement in-line protein concentration measurements right on the manufacturing floor.

For our filtration and chromatography products, we focus on capacity expansion. We are executing on the ATF move from Waltham to Marlborough, with increased space for our single-use ATF production line within our Marlborough facility. We are right on track to complete the first phase of OPUS build-out here in quarter 4, adding 4 suites into Waltham.

And finally, we just commenced the build-out of additional clean room space in Rancho Dominguez, which we expect to come online during the second half of 2020 and will increase overall capacity for Spectrum modules and ProConnex products.

In August, we went live with Phase 1 of SAP implementation for our East Coast sites, and we're on track to complete Phase 2 for West Coast and select Europe and Asia sites in the second half of next year.

Finally, we're excited about the launch of our new products, in particular, the TFDF technology, where we received very positive reaction to the technical launch at the annual BPI show in Boston. We see this technology as the first real scalable innovation in harvest clarification in many years. With a primary focus on CHO-cell purification, we're currently executing on customer trials and expect our process development TFDF system to hit the market in quarter 4 as customers look to develop scalable clinical manufacturing processes in their facilities in 2020.

In parallel, we have already taken orders from our early adopters for the production-scale TFDF systems, which will be delivered in quarter 4 and Q1 of next year.

Finally, our next-generation XCell ATF controller is right on track to launch later this quarter, giving customers significantly more flexibility and multiplexing capabilities as they implement ATF into their cell culture process intensification workflows.

Moving now to our quarter 3 financial results and year-to-date performance. Overall, our organic growth for the quarter was 28% and over 35% year-to-date. For our direct filtration and chromatography businesses, organic growth was over 40% for both the quarter and the first 9 months of 2019. Gains were driven by OPUS prepacked columns, single-use ATF systems and hollow fiber module systems and flow paths. Gene therapy accounts for again in the 13% to 15% range of revenue, and European sales were up almost 50%.

Our proteins business, while down in the quarter due to expected softness in ligands, is still up significantly year-to-date. And we now expect to post our first 15%-plus growth year for proteins since 2015.

As discussed in prior calls, we expect our largest OEM customer for ligands to diversify their supply chain next year, which will reduce overall ligand demand for Repligen in 2020. To limit the impact on our overall proteins business, we continue to invest in a Repligen-owned ligand portfolio, and we are very encouraged by reports that the Protein A resin utilizing our NGL-Impact A ligand is gaining traction in the marketplace, with a number of key accounts expected to scale up over the next few years.

So moving now to our direct businesses. Our filtration business had an excellent quarter, with strength in hollow fiber modules, flow paths, TFF systems and single-use ATF.

Our Spectrum business accelerated in the third quarter, with all regions up approximately 30%. We are seeing continued adoption of hollow fiber products across multiple application areas from vaccines to gene therapy to animal health. Demand for our hollow fiber TFF systems continues to accelerate, with strong adoption of our production-scale systems in quarter 3.

Spectrum deal model revenue synergies for the year are now close to $12 million, with overall synergies from the Spectrum deal topping $17 million, which is tracking about 1 year ahead of plan.

On the ATF front, we continue to see strong interest in the technology, with process development evaluations up 35% this year. Demand across the regions remained high, and we are encouraged by some of the scale-up plans for key accounts in Asia.

Single-use ATF sales were again robust with customers moving into late-stage implementation as we finish off 2019 and move into 2020. We expect single-use ATF to comprise 28% to 30% of XCell ATF sales by the end of the year.

Our flat sheet cassette business continues to perform well, with increased demand for our single-use cassettes in process development and continued traction in Asia and at gene therapy accounts.

In chromatography, our prepacked columns business had an outstanding quarter, with very strong revenue and unit volume growth. As reported last quarter, we continue to see strong adoption of gene therapy accounts as customers recognize the value and benefits of prepacked columns for this application.

So overall, we really -- we have executed really well here through the first 3 quarters of 2019, with strong traction across our businesses. C Technologies' integration is right on track. We are ahead of our revenue synergy plan for Spectrum. New products are hitting the market, and we're building out capacity to stay ahead of long-term demand. We are very confident now about our finish here in 2019, and I look forward to updating you in February on our overall performance for the year.

And with that, I will hand the call over to Jon to walk through our financial results.

--------------------------------------------------------------------------------

Jon K. Snodgres, Repligen Corporation - CFO & Secretary [4]

--------------------------------------------------------------------------------

Thank you, Tony, and good morning, everyone. To date, we are reporting our financial results for the third quarter of 2019 as well as updating our financial guidance for the year. Unless otherwise mentioned, all financial measures discussed today reflect non-GAAP measures.

Before diving into our quarterly results, I'll take a minute to close out on our recent financing activities, including the impacts on cash and share count. The final result of the combined effect of our year-to-date financial raises, extinguishment of our May 2016 convert and the C Technologies deal, has a net increase in cash of $291 million and the issuance of an estimated 8.1 million new shares.

Moving now to our third quarter and year-to-date 2019 financial results. As you've seen in our press release this morning, we delivered very strong financial performance for the third quarter. And we are again raising both our top and bottom line financial guidance for the year, while we continue to ramp up our investments in capacity, systems and personnel to stay ahead of strong market demand. Specifically, we delivered revenues of $69.4 million, with growth of 42% at constant currency and organic growth of 28%.

Secondly, we increased adjusted operating income by 34% year-over-year to $15.1 million while continuing to invest in capacity and IT systems to set us up for long-term growth.

And finally, on the bottom line, we reported a 44% year-over-year increase in adjusted EPS to $0.26 per fully diluted share.

As Tony mentioned earlier, our direct product franchises, filtration and chromatography, continue to perform very well, growing at greater than 40% organically on a combined year-to-date basis versus the comparable period in 2018.

On a regional basis, through the first 9 months in 2019, direct product revenue growth, excluding C Technologies, was strongest in North America at 52%, while Asia Pacific grew at 44% and Europe grew at 26%. Overall, 57% of our direct product revenue for the year-to-date period came in from North America; and Europe and Asia accounted for 27% and 16%, respectively.

Based on market strength and overall visibility, we continue to expect another strong quarter in Q4 for our proteins, filtration and chromatography businesses against tough comps in our direct businesses in 2018.

Overall, for the year, we continue to expect that our direct product lines will grow at greater than 35% organic, and proteins will grow at greater than 15% organic.

Moving down our income statement. Third quarter 2019 adjusted gross profit was $39 million, an increase of $11.4 million or 42% compared to the third quarter of 2018. Adjusted gross margin was 56.1%, an increase of 50 basis points compared to the third quarter of 2018, directly resulting from strong operational execution, partially offset by facility, capacity and systems investments to support our long-term growth expectations.

Through the third quarter of 2019, year-to-date adjusted gross margin for the company was 56.9%. We continue to expect modestly lower adjusted gross margins in the fourth quarter, stemming from the aforementioned strategic investments related to capacity, systems and personnel, to support higher product volumes flowing through our factories.

With respect to operating expenses, adjusted research and development costs for the third quarter of 2019 expanded to $5.1 million or 7.4% of sales compared to $3.6 million in the 2018 period. The increase from the third quarter 2018 period was due to the addition of C Technologies and overall increases in program spend to bring important new products to market.

Adjusted R&D expenses through the third quarter 2019 year-to-date period were 7% of revenue and continue to support key investments in our new ATF controller technology, TFDF systems as well as in the C Technologies' pipeline. We continue to expect an overall adjusted R&D expense of approximately 7% of revenue for full year 2019.

Shifting to SG&A. Adjusted SG&A expense was $18.7 million in the third quarter of 2019 compared to $12.6 million for the comparable period in 2018. The year-over-year increase in adjusted SG&A was tied to the addition of C Technologies to Repligen and the expansion of our commercial organization, facilities and IT systems. We continue to expect increases in adjusted SG&A expenses in the fourth quarter of 2019, supporting the expansion of facilities in Waltham, depreciation related to our SAP implementation and other IT investments as well as global commercial and operations headcount to support long-term growth.

Overall, we continue to expect full year adjusted SG&A expenses to be approximately 26% of overall revenue, and this is reflected in our full year 2019 guidance. We continue to expect total adjusted operating expense to come in at 33% to 34% of sales for the year.

Moving now to adjusted income and EPS. Consistent with earlier comments on our third quarter 2019 adjusted operating income was $15.1 million, a 34% increase compared to $11.3 million reported in the third quarter of 2018. Our adjusted operating margin was 21.8%, a reduction of 100 basis points compared to the third quarter of 2018, where sales volume leverage in the quarter was more than offset by increased investments.

For the full year of 2019, we now expect adjusted operating margin expansion to increase by 50 basis points versus our last guidance to a range of 23% to 24%.

Third quarter 2019 adjusted net income was $13.3 million, an increase of 62% compared to $8.2 million in the third quarter of 2018.

Adjusted EPS increased to $0.26 per fully diluted share in the third quarter of 2019, an increase of 44% from $0.18 in the third quarter of 2018.

Our cash and cash equivalents, which are GAAP metrics, totaled $513.5 million at September 30, 2019, net of our second and third quarter financing activities, convertible debt extinguishment and the acquisition of C Technologies.

On a third quarter 2019 year-to-date basis, we generated free cash flow of $33.5 million, inclusive of $49.5 million of operating cash flow, plus $16 million of capital investments primarily related to our ongoing capacity expansion activities and our SAP implementation program.

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 2% headwind on sales.

Today, with our expectations of continuing strong market conditions and overall execution, we are increasing and tightening our 2019 full year revenue guidance, a GAAP metric, to $267 million to $270 million, an increase of $2.5 million from the midpoint of our previous range, reflecting growth in the range of 38% to 39% as reported and 31% to 32% organic.

We are maintaining our adjusted gross margin guidance for 2019 at 56% to 57%, and we are increasing our non-GAAP operating margin guidance by 50 basis points to 23% to 24% of revenue. We are also raising our guidance for adjusted operating income to $62 million to $64 million, an increase of $2 million at midpoint compared to our prior guide.

On adjusted other income and expense, we now expect to see a net full year income of approximately $3 million, an increase of $1 million from our previous guidance, reflecting higher-than-expected interest income from cash on hand. We are now expecting our 2019 adjusted income tax expense to be approximately 22.5% of adjusted pretax income. The 150 basis point reduction compared to our previous guidance is a result of higher-than-expected benefits from stock compensation exercises investing.

We are also raising our full year 2019 adjusted net income guidance by $3 million at midpoint to a new range of $50 million to $52 million as well as the midpoint of adjusted EPS by $0.06 to the range of $1 to $1.04 per fully diluted share.

We are increasing our adjusted EBITDA range by $1 million at the midpoint to $69 million to $71 million for full year 2019, with depreciation expenses expected to be $7.2 million and intangible amortization expenses expected to be $13.6 million.

In terms of fully -- weighted fully diluted average share count assumptions for 2019, we have slightly lowered our expectation to 49.9 million at year-end. For the fourth quarter, weighted average fully diluted shares are expected to be approximately 52.5 million. We are guiding to full year 2019 CapEx investment of $20 million, at the upper end of our prior guidance.

In terms of our 2019 year-end cash and cash equivalents, a GAAP metric, we now expect to be in the range of $520 million to $530 million, an increase of $10 million at the midpoint compared to our prior guidance.

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

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) First question is from Tycho Peterson with JPMorgan.

--------------------------------------------------------------------------------

Eleni Maria Apostolatos, JP Morgan Chase & Co, Research Division - Research Analyst [2]

--------------------------------------------------------------------------------

This is Eleni on for Tycho. Going back to your comments on the protein business with growth now expected at 15% for the year, I know you're -- you've called out order lumpiness in the past, but can you talk a little more on the dynamics you're seeing and the offsets to the lower ligands demand?

--------------------------------------------------------------------------------

Anthony J. Hunt, Repligen Corporation - CEO, President, Director & Member of Scientific Advisory Board [3]

--------------------------------------------------------------------------------

Yes. So in general, I think we had a very strong first half of the year for both ligands and growth factors. Q3 came in exactly as we had predicted, which was lighter in ligands based on the demand that we were seeing from our top 2 OEM accounts. Growth factors had a very good Q3 as well, so it offset a little bit of the lightness in ligands. And as we look into Q4, we can see exactly where we'll finish for the year. So we're confident about a 15% organic growth for proteins, which is, honestly, the first time in -- since 2015 that we've seen that.

And if you look at the overall year, I think it was real strength in growth factors and a good solid year for ligands.

--------------------------------------------------------------------------------

Eleni Maria Apostolatos, JP Morgan Chase & Co, Research Division - Research Analyst [4]

--------------------------------------------------------------------------------

Great. And then in terms of leveraging the direct C Tech sales force in China, among other regions, could you talk about the cross-selling opportunities? And in terms of the integration efforts, where do you stand? And what still needs to get done?

--------------------------------------------------------------------------------

Anthony J. Hunt, Repligen Corporation - CEO, President, Director & Member of Scientific Advisory Board [5]

--------------------------------------------------------------------------------

Sure. On the C Tech side, we've taken the approach of building a dedicated small sales team that will drive process analytics sales for Repligen. So obviously, the Solo and FlowVPE products are the -- our first products that we're putting into what we call process analytics. But if we go out over the next few years, our expectation will be that we'll continue to build out that portfolio of products.

So we've gone with a strategy of a small dedicated sales team, very similar to what we do with the bioprocess product lines where we talk about the BSS, which are the bioprocess sales specialists. So think about C Tech's sales team as a dedicated group of sales specialists that are focused on analytics.

Now once we've got the team trained and up and running, which we expect will happen by the end of the year, clearly, there will be a lot of interactions between the regular Repligen sales force and the C Tech sales team. So we'll expect that those teams will work very closely together, but the folks that are responsible for the business will be the dedicated team.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

The next question is from Puneet Souda with SVB.

--------------------------------------------------------------------------------

Puneet Souda, SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst [7]

--------------------------------------------------------------------------------

Tony, Jon, so first of all, I just wanted to get a sense of your view on the overall market growth where you saw strong growth from the peers. Can you give us a sense at a high level of maybe the overall growth that you were seeing versus any share taking that you had in the quarter as well and sort of the new product expansion?

--------------------------------------------------------------------------------

Anthony J. Hunt, Repligen Corporation - CEO, President, Director & Member of Scientific Advisory Board [8]

--------------------------------------------------------------------------------

Yes. I think overall, we've maintained a very high-growth rate through 3 quarters for our direct product lines. Obviously, the filtration and chromatography businesses have done very well. We continue to see strong order demand as we've moved through 3 quarters of the year. So again, expect that we'll finish the year off fairly strongly here.

So in general, I think the reason that our growths are good is really related to the differentiation of the products that we have in the marketplace. So our filtration portfolio is highly differentiated, whether you're dealing with ATF or the TangenX flat sheet cassettes or the systems or ProConnex flow paths from Spectrum. So highly differentiated there.

And then if you look at the chromatography portfolio, our OPUS prepacked columns are also highly differentiated in that area. And obviously, for us, one of the things that we've been trying to do is really start to look at predicting long-term demand and making the investments into capacity build-outs. And that's what you're hearing from us, right? We're building -- we're transferring ATF over into Marlborough. We made a major investment a year ago about building out systems. We're doing that in a very systematic manner. We're building out in Rancho, which is where the Spectrum -- main Spectrum site is for our modules and ProConnex products. And obviously, we continue to build out on OPUS as we look to the future.

So we're -- we really like the position we have in the marketplace. We like the new products, Puneet, that are coming through. Whether it's TFDF or ATF controller, and I think it puts us in a good position going forward.

--------------------------------------------------------------------------------

Puneet Souda, SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst [9]

--------------------------------------------------------------------------------

Okay. And then, overall, in terms of the gene therapy, I just wanted -- I think you mentioned the 13% to 15% of the mix overall, but just -- I don't know if you provided a growth number there. And what's the sort of the sustainability of that? And could that number accelerate here given the sort of the demand in the market as this market is coming off the early phase and sort of growing into some maturity here?

--------------------------------------------------------------------------------

Anthony J. Hunt, Repligen Corporation - CEO, President, Director & Member of Scientific Advisory Board [10]

--------------------------------------------------------------------------------

Yes. It's a great question. And I think for us right now, we're really pleased that we're through 3 quarters of the year. We're tracking at that 13% to 15% of revenue, and that's total revenue for Repligen. If you look at it without the OEM business, we're probably closer to 18% of revenue in gene therapy.

Obviously, the market is still very much in its infancy, has clearly accelerated over the last couple of years. We see a lot of activity within the CDMO space. And there's a significant number of gene therapy companies that are scaling.

I think the big question is what happens in 2020 and 2021 as these companies bring their products through Phase I, Phase II. So I think we all kind of have to wait and see a little bit. But I think everybody is encouraged, and I'm sure all our peers are -- see it the same way that everybody is encouraged by the traction that we're all seeing in the gene therapy space.

--------------------------------------------------------------------------------

Puneet Souda, SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst [11]

--------------------------------------------------------------------------------

And if I could ask the last one on C Technologies. Could you help us understand sort of with the new commercial force in place and the products that you have in the market Solo and Flow, what are the opportunities to -- are there more opportunities to expand downstream? Or is it just largely in capturing new accounts? Just could you help understand where the next phase of sort of expansion lies for you here as you integrate C Tech?

--------------------------------------------------------------------------------

Anthony J. Hunt, Repligen Corporation - CEO, President, Director & Member of Scientific Advisory Board [12]

--------------------------------------------------------------------------------

Yes. I think the big thing with C Tech is that Craig and the team have done a tremendous job over the last 8 to 10 years building out that franchise. It was clear, when the acquisition happened, that we really needed to build out the commercial team. We're adding in a number of salespeople, have added in a number of salespeople in North America. We've done the same thing in Europe. We've added in, in Korea and India, and we're using some of the key C Tech distributors in China and Japan.

So for me, they're -- we're scaling in the right direction. The applications for protein concentration measurement go across the whole workflow, everything from postclarification, all the way through to final formulation. The types of labs that are interested and are adopting the SoloVPE, which is the off-line, [app-line] technology. It ranges from the process development analytics groups to the quality control teams, to formulation labs to -- on the manufacturing floor. And I think that that's the #1 goal right now, really, of the new sales team is to bring -- to do multisite adoption at accounts that we're in and to bring new accounts into the fold.

And I think as we go through 2020, we expect that FlowVPE is going to gain some traction, which is the in-line protein concentration measurement device. We've seen actually some -- a really nice uptick in demand as we've gone through this year and expect that that's going to continue into 2020.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

Our next question is from John Kreger with William Blair.

--------------------------------------------------------------------------------

Jonathan Marley Kaufman, William Blair & Company L.L.C., Research Division - Associate [14]

--------------------------------------------------------------------------------

This is Jon Kaufman on for Kreger. So looking at your updated 2019 guidance, I think it suggests organic growth of about 20% in the fourth quarter. Just given your bullish demand commentary, is that a reasonable level of top line growth for investors to think about over the next few years?

--------------------------------------------------------------------------------

Anthony J. Hunt, Repligen Corporation - CEO, President, Director & Member of Scientific Advisory Board [15]

--------------------------------------------------------------------------------

Yes. So in terms of Q4, you're right, that is fairly close to what the predicted organic growth will be in Q4. Clearly, we've had a stellar year. I think people should remember that the second half of 2018 was really strong. Our Q4 in 2018 was the strongest quarter that we had in 2018. So not overly concerned at all that 20% organic growth is where we'll finish up in Q4.

I think when it comes to 2020/2021, especially when it comes to 2020, I think it's a little early to call what the organic growth is going to be. We clearly have some headwinds, right, with obviously, GE moving some volume in-house. We have some very tough comps. We've set that up this year by having a tremendous year ourselves. And -- but to counter that, I think we're really happy with our product portfolio. We love the products that are coming through out of our R&D team. And we just want to see a little bit how the orders play out here in Q4 and early Q1 before making a call for 2020.

But I think longer term, we've always said 10% to 15%. Organic growth is a real target for us as a company. And obviously, with new products coming through, we'd like to be able to target the high end of that range.

--------------------------------------------------------------------------------

Jonathan Marley Kaufman, William Blair & Company L.L.C., Research Division - Associate [16]

--------------------------------------------------------------------------------

Okay. That makes sense. And then on TFDF, can you just remind us what makes this a really differentiated offering? And how do you think about the size of this opportunity compared to ATF?

--------------------------------------------------------------------------------

Anthony J. Hunt, Repligen Corporation - CEO, President, Director & Member of Scientific Advisory Board [17]

--------------------------------------------------------------------------------

Yes. I think the -- when you think about ATF, ATF is very mature in the sense that it's been around for 10-plus years. Obviously, we've had the technology since 2014. So it has a number of applications that people are using from traditional perfusion to N-1. Obviously, has done very well. Hard to make a true comparison to TFDF because TFDF is just essentially launching as we speak.

What differentiates TFDF versus other technologies is you're getting the benefit of depth filtration and KrosFlo filtration in a single device. And to be able to do that with alternative technologies, you have to use some combination of centrifugation and depth filtration to be able to accomplish and get to the same levels of, not purity, but the same levels of clarity that comes out of the bioreactor.

So early days. We're very encouraged by the work that's being done at the alpha/beta sites that we've been working with through this year. And I think it's a really good endorsement that a number of companies have moved forward and placed orders for large skid systems to be able to run TFDF technology in their manufacturing facilities in 2020.

So I think that's really the encouraging part here. I think we're too early to be able to make a comparison between TFDF and ATF. The way I would look at it is Repligen is now really well positioned with 2 clarification technologies: 1 is ATF, which is predominantly used in perfusion; and then TFDF, which will be used in fed-batch. So it puts us in a really good position in the harvest clarification space for bioprocessing.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

Next question is from Jacob Johnson with Stephens Inc.

--------------------------------------------------------------------------------

Jacob K. Johnson, Stephens Inc., Research Division - Analyst [19]

--------------------------------------------------------------------------------

Maybe too early to ask this question, but now that you've owned C Tech for a couple of months here and you've got some cash on the balance sheet, has your interest in process analytics assets changed now that you own C Tech? Are you seeing more M&A opportunities here? Or just any updated thoughts there.

--------------------------------------------------------------------------------

Anthony J. Hunt, Repligen Corporation - CEO, President, Director & Member of Scientific Advisory Board [20]

--------------------------------------------------------------------------------

Yes. I think M&A for Repligen is -- it's a big part of what we've done over the last 5 years, and I think it's something that we will continue to look at. Our pipeline in 2019 is very similar to what we have in 2018. It's all around trying to find the right assets. In terms of process analytics, obviously, that's an area that we really like. But we also like filtration and chromatography. So we continue to look broadly at the space and expect that's something that we're going to continue to do in terms of bringing other assets into the fold over the coming years.

--------------------------------------------------------------------------------

Jacob K. Johnson, Stephens Inc., Research Division - Analyst [21]

--------------------------------------------------------------------------------

And then maybe could you give us an update on FlowVPE? I think you're making some investments there ahead of the potential sort of growth ramp. Just talk about how that product is doing and how we should think about it going forward.

--------------------------------------------------------------------------------

Anthony J. Hunt, Repligen Corporation - CEO, President, Director & Member of Scientific Advisory Board [22]

--------------------------------------------------------------------------------

Yes. So I think you probably can see from the numbers when we announced the deal, FlowVPE represented a small part of the overall revenues from C Technologies. So really, what we've been doing this year, and Craig and his team have been very diligent in doing this, is really just working with a number of different large biotech pharma companies as they look to implement protein concentration measurement as an in-line tool. So clearly made progress this year.

The R&D team is really busy working on the next-generation version of FlowVPE. We haven't really decided exactly the timing of when that hits the market, but we're really working on things like software and just in terms of the overall size of the technology, they are the areas that we're focused on. So it's an engineering software, next-generation-type product, and we'll talk more about it, I'm sure, when we get into the February, May time frame next year.

--------------------------------------------------------------------------------

Operator [23]

--------------------------------------------------------------------------------

Next question is from Paul Knight with Janney Montgomery Scott.

--------------------------------------------------------------------------------

Paul Richard Knight, Janney Montgomery Scott LLC, Research Division - MD, Head of Healthcare Research & Senior Equity Research Analyst [24]

--------------------------------------------------------------------------------

Tony, could you talk to the [sell-in] gene therapy market or to business that you have? Is it growing above or at your overall corporate rate? And specifically, what products fit that market?

--------------------------------------------------------------------------------

Anthony J. Hunt, Repligen Corporation - CEO, President, Director & Member of Scientific Advisory Board [25]

--------------------------------------------------------------------------------

Yes. So I'll start with the products. When we look at our product portfolio, we clearly are seeing good traction with our OPUS product line, with our flat sheet cassette and hollow fiber filter modules and ATF as well. So it does actually go across a significant swath of what we have in terms of products. I don't have the exact growth rate for gene therapy within our portfolio, but it's definitely growing at or above the growth rate that we're seeing overall in the company.

So I think we're -- when you look at the types of companies that we're operating with, it's really the CDMOs and the medium- to larger-sized gene therapy accounts. And so it's been very active through 3 quarters and expect that will continue to stay active.

And I think, as I said earlier, I think the big question is really around the products that are in Phase I, Phase II, Phase III, how they perform in clinical trials and if the momentum still continues for gene therapy, which I'm sure it will over the next few years.

--------------------------------------------------------------------------------

Paul Richard Knight, Janney Montgomery Scott LLC, Research Division - MD, Head of Healthcare Research & Senior Equity Research Analyst [26]

--------------------------------------------------------------------------------

And then lastly, Tony, regarding the protein business. I know you have a partner operating out of Wales and also your German, I believe it's a JV, but could you talk about how those programs or partnerships are moving along?

--------------------------------------------------------------------------------

Anthony J. Hunt, Repligen Corporation - CEO, President, Director & Member of Scientific Advisory Board [27]

--------------------------------------------------------------------------------

Yes. I'll start with Navigo. So we have a relationship, business relationship with Navigo, which is in Germany. So they're working on next-generation ligands, and so that program we put in place 2 years ago. We're -- we've made a lot of progress, expect to hear about product launches when we hit 2020.

The work with Purolite has really been around the NGL-Impact A ligand that we launched a little over a year ago. As I said in my prepared remarks, that product appears to be doing very well in the marketplace. And I think as customers look to scale with the technology, there's a benefit for Repligen in the long term. So it's really around building out for us a portfolio of ligands.

I think when -- I think I mentioned this before, but when we were looking at our overall strategy in the protein space, almost all the ligands that we were manufacturing were owned by our partners. And so we feel like it's important for us to develop a portfolio of Repligen-owned, developed ligands that are unique and differentiated in the marketplace. And that's been the program that we've been running with for a few years now. And I expect to see over the next couple of years, the fruits of that work.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [29]

--------------------------------------------------------------------------------

Just one question for me, I guess. A lot of them have been answered, but regarding the C Tech acquisition, last quarter, you talked about incorporating some of that technology into some of your filtration products. I realize it's still early days, but I'm wondering what kind of progress you've made on that front.

--------------------------------------------------------------------------------

Anthony J. Hunt, Repligen Corporation - CEO, President, Director & Member of Scientific Advisory Board [30]

--------------------------------------------------------------------------------

Yes. A great question. And I think the -- what I was referring to on the last call was really the potential of FlowVPE as part of systems that Repligen continues to manufacture. So if you -- a year ago, we put in place a systems team focused very much on TFF systems in the hollow fiber space. Obviously, they're very much used downstream. And so as we think about FlowVPE, we think about how we can integrate that into overall skid systems.

I think for now and probably for the foreseeable future, it's really around getting FlowVPE broadly adopted in the marketplace. And obviously, it will be something that we'll be able to offer as a either integrated or stand-alone with systems that we would develop.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

Next question is from Raghuram Selvaraju with H.C. Wainwright.

--------------------------------------------------------------------------------

Edward D. Marks, H.C. Wainwright & Co, LLC, Research Division - Research Analyst [32]

--------------------------------------------------------------------------------

This is Edward Marks on for Ram. You mentioned that the Spectrum integration is about a year ahead of your internal estimates, so I was just wondering if you could give any guidance on how the C Tech integration is going regarding those same metrics, whether it's progressing faster. At the same rate? And do you anticipate this pace accelerating at all in the future?

--------------------------------------------------------------------------------

Anthony J. Hunt, Repligen Corporation - CEO, President, Director & Member of Scientific Advisory Board [33]

--------------------------------------------------------------------------------

Yes. I think in terms of -- obviously, Spectrum has done very well for us. Really, really good product line. When we did that deal, we talked a little bit about -- I think that deal got done in August, and we said not to expect any sort of revenue synergies in the partial year and that they would really start to kick in, in the first full year of ownership. It's no different with C Tech, right? In terms of what we're trying to do with C Technologies. The real step one for us is to build out the commercial organization, get them trained. That's what we're doing. That's what we're focused on. There is no real -- there are no revenue synergies that we're going to see in 2019.

Once we have our sales team up and running, then we can start to see what the impact is of having a dedicated organization that is sales, field application specialists, so the methods development folks that Craig has in place and also the service team that's actually really a broad dedicated service team that's already in place that we'll be able to leverage.

So I think, really, in terms of revenue synergies, there'll be some next year. I probably will be able to give a little bit more guidance when we get to the February call in terms of what to expect.

--------------------------------------------------------------------------------

Edward D. Marks, H.C. Wainwright & Co, LLC, Research Division - Research Analyst [34]

--------------------------------------------------------------------------------

Understood. And just moving back on to M&A really quickly. I was hoping you can dive a little bit deeper into how you answered that previous question. Just really wondering if you see viable targets currently, especially at the appropriate prices. And then what kind of size and shape of a transaction might you guys be looking for? And then you mentioned a little bit on the business segment previously, but would you be increasing your presence for systems that you currently are in? Or could you conceivably look to move into an entirely new area?

--------------------------------------------------------------------------------

Anthony J. Hunt, Repligen Corporation - CEO, President, Director & Member of Scientific Advisory Board [35]

--------------------------------------------------------------------------------

Okay. A few questions there. So I'll start with size and shape. We've -- I think we've shown over the last 5 years that the targets that we've looked at are in that $5 million to $40 million in revenue range. That's not changing. That's kind of the size that we've always looked at. Clearly, our criteria when it comes to M&A is really around technology leadership. That's what we do at Repligen. That's what's differentiated us in the marketplace.

So when you look at assets, there are a lot of assets out there that we've passed on, right? Because when we look at the technology or we look at the growth or we look at what we could do with that technology, we've come to the conclusion that it's just not the right fit for Repligen. So we've been very selective in terms of what we've looked at and what we've gone after.

In terms of price that you pay, I think it all depends, right? There are assets out there that have lower multiples. But in general, I think good bioprocessing assets are selling in the 6x to 10x revenue range. And every one is unique and every one is different.

In terms of moving outside our core bioprocess space, I think that -- I think we've really stayed true to bioprocessing. We haven't looked into the research space. I think I made some comments over the last few calls that we had some opportunities in the last year or 2 to look at other analytical companies, but they tended to be 80% to 90% in the research space and maybe 10% in bioprocessing, and we didn't feel like that, that was the right move for Repligen.

So we'll continue to assess. It doesn't mean we would totally reject moving into an adjacent space. But I think what we've done over the last 5 years, that blueprint is going to be a consistent blueprint that you're going to see as we move forward.

--------------------------------------------------------------------------------

Operator [36]

--------------------------------------------------------------------------------

The next question is from Joe Munda with First Analysis.

--------------------------------------------------------------------------------

Joseph P. Munda, First Analysis Corporation - VP [37]

--------------------------------------------------------------------------------

A lot of my questions have been answered, but I just wanted to ask one question regarding the build-out of capacity. I'm curious, you talked -- you gave some detail there. You talked about the build-out in Rancho. I was wondering if you could give us a little bit more, maybe high level or a little bit more color on the -- what types of business are garnering the capacity build-out themselves. Where do you see resources devoted to which business lines?

--------------------------------------------------------------------------------

Anthony J. Hunt, Repligen Corporation - CEO, President, Director & Member of Scientific Advisory Board [38]

--------------------------------------------------------------------------------

Yes. I think in terms of our capacity build-out, you look at the priorities we have right now, we can see -- and I think we've been really transparent about this, which is our OPUS business. We want to really build out capacity that goes out over 4 or 5 years, so that's kind of been our #1 focus. We're seeing, obviously, very strong demand again in 2019 for our ATF product line. So again, we made the decision to centralize ATF into a larger space in Marlborough, where we have our filtration Center of Excellence.

And then the final part of the equation really has been around our Spectrum business, especially in Rancho and as that historically has been in that 15% to 20% growth range. And now as you can see, up around 30% last quarter. We've seen that acceleration, and we really see the need to make sure that we're staying ahead of demand for those product lines.

So we -- yes, because of the way we're set up with our business teams and the way operations runs, we have dedicated folks to each of those business from an operations point of view. So they are the folks that are really dedicated to building out the capacity over the next few years.

--------------------------------------------------------------------------------

Operator [39]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Anthony J. Hunt, Repligen Corporation - CEO, President, Director & Member of Scientific Advisory Board [40]

--------------------------------------------------------------------------------

Great. I'd like to thank everybody for joining us this morning. Obviously, a really good 9 months for Repligen. Look forward to catching up with everybody at the end of February and bringing you up to speed on how we did for fiscal year 2019.

So thanks, everybody, for joining.

--------------------------------------------------------------------------------

Operator [41]

--------------------------------------------------------------------------------

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