Repligen Corporation (NASDAQ:RGEN) Q4 2023 Earnings Call Transcript
Repligen Corporation (NASDAQ:RGEN) Q4 2023 Earnings Call Transcript February 21, 2024
Repligen Corporation reports earnings inline with expectations. Reported EPS is $0.33 EPS, expectations were $0.33. Repligen Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, ladies and gentlemen, and welcome to Repligen Corporation's Fourth Quarter of 2023 Earnings Conference Call. My name is Sabrina, and I will be your coordinator. [Operator Instructions]. I would now like to turn the call over to your host for today's call, Sondra Newman, Head of Investor Relations for Repligen.
Sondra Newman: Thank you, and welcome to our fourth quarter of 2023 report. On this call, we will cover business highlights and financial performance for the 3- and 12-month periods ending December 31, 2023, and we will provide financial guidance for the year 2024. Repligen's CEO, Tony Hunt; and our CFO, Jason Garland, will deliver our report, and then we'll open the call up for Q&A. 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 risks related to our business is included in our filings with the Securities and Exchange Commission, including our 2023 annual report on Form 10-K, last year's annual report, our quarterly reports on Form 10-Q and our current reports on Form 8-K, as well as other filings that we make with the 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 are providing non-GAAP financial results and guidance, unless otherwise noted. 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. Adjusted non-GAAP figures on this call include the following: book-to-bill ratios, organic revenue growth, base business revenue which excludes COVID and M&A, non-COVID revenue, cost of sales, gross profit and gross margin; operating expenses, including R&D and SG&A, income from operations and operating margins, other income, pretax income, effective tax rate, net income, diluted earnings per share as well as EBITDA, adjusted EBITDA and adjusted EBITDA margins.
These adjusted financial measures should not be viewed as an alternative to GAAP measures but are intended to best reflect the performance of our ongoing operations. Now I'll turn the call over to Tony Hunt.
Anthony Hunt: Thank you, Sondra. Good morning, everyone, and welcome to our 2023 fourth quarter and year-end report. In addition to reporting out on our financial results today, the key objective for this call is to provide insight into how we see 2024 playing out for Repligen and the pacing of revenue as we go through the year. Having had a few months to reflect on our Q4 results, in 2023 in general, we believe we are seeing some clear indicators that our markets are beginning to turn in a positive direction, especially given the strength in orders coming out of last year. This will help drive growth for the company, especially as we move into the second half of 2024. As we all know, 2023 was a challenging year for Repligen in the bioprocessing industry.
The first half of the year saw elevated stock levels at both CDMO and pharma accounts, conservative capital spending and project delays at pharma companies and the deterioration in China where orders dropped off rapidly and new opportunities for products declined. In the second half of the year, we started to see some positive signs of recovery. We aren't ready to call a full recovery yet but there is good reason for optimism. We see 4 indicators for Repligen; opportunity funnel growth, improving pharma ordering patterns, early indications of CDMO recovery and overall book-to-bill strength. So let's start with our opportunity funnel. Our sales funnel improved in 2023 with our 50% and above opportunities up more than 50% compared to the start of the year.
This is an important metric that we believe reflects the likelihood of customers placing orders in the near term. We also saw a rebound in pharma demand, especially in Q3, where pharma orders were up 50% versus prior quarter. We finished the year with second half pharma orders up greater than 30% versus H1. The CDMO market has also improved in the second half of 2023 with orders up more than 25% in Q4 versus Q3 and up more than 20% versus the fourth quarter of last year. Again, some positive signs from more customers for the first time since the first half of 2022. Overall, our book-to-bill improved in the second half of the year, coming in at 1.07 in Q3 and 1.03 in Q4. Our Filtration franchise also had a positive book-to-bill in both Q3 and Q4 at 1.15 and 1.03, respectively.
Ex-COVID, the Filtration book-to-bill was 1.13 in Q4. So 2 strong quarters in a row of orders largest and most impacted by COVID franchise. When I look at the full year, I was also very pleased with the way the Repligen team executed, staying focused on the key goals we set for ourselves at the beginning of 2023, namely: one, we want to make further inroads into new modalities; two, we wanted to strategically manage key accounts to accelerate adoption of our technologies, especially in our top pharma and CDMO accounts; three, we wanted to launch new products with a focus on advanced Analytics, systems and Filtration; and four, we wanted to rebalance the organization to address margin challenges. First, on new modality inroads. Our new modalities business, which covers cell and gene therapy and mRNA continues to gain ground.
Driven by several late stage and commercial wins in 2023, new modality revenues in the fourth quarter were up 9% year-on-year. For the full year, new modalities represented 18% of total revenues and while up only slightly versus 2022, the results are still impressive in light of the double-digit decline in sales across our industry. On the orders front, new modality accounts were up more than 10% in the second half of 2023 versus the first half of the year and up greater than 15% for the full year compared to 2022. The order strength was driven by Chrom, Filtration and Analytics franchises with notable product line strength from OPUS, Fluid Management assemblies and ARTeSYN systems. We also added more than 85 new accounts in 2023. So we're really encouraged by our position and differentiation in this important market.
Next, on managing key accounts. A key objective for us in 2023 was to build out a key account program and team to drive growth at our top pharma and CDMO accounts. With the key accounts team in place by midyear, we were able to focus this group on improving our portfolio visibility. In 2023, orders from our top 10 pharma accounts were up 50% from the second half of 2023 compared to H1 and 20% for the full year compared to 2022. Of our top 10 CDMO accounts, orders in the second half of 2023 were flat versus H1, but up nearly 15% when compared to full year 2022. Again, directionally positive signs that our top accounts are beginning to show growth momentum. Moving now to new product launches and adoption. Each year, it's been our goal to launch 8 to 10 new products.
And in 2023, we launched 10. Although these were first year [indiscernible] product offerings, they generated over $12 million in revenue in 2023. So despite the year's challenges, we're really proud of our innovation track record. In 2023, 13% of our total revenue came from products launched between 2021 through the end of 2023. In the fourth quarter alone, that number was 16%. This past year, the success of our new products was in 3 areas. The first was RPM, where our Analytics customers are seeing the benefits of real-time process monitoring. Second was our ARTeSYN RS systems where we have a market-leading single-use system portfolio. And third was ATR, where the new XCell controllers are doing well in the marketplace and providing value in the from of more automation and control for our process intensification customers.
And finally, regarding rebalancing resources. Our entire team from top to bottom focused on cost containment and the leadership team rolled out programs to rightsize our organization. Through this difficult but prudent process, we reduced our workforce by more than 15%. We are consolidating facilities, merging 3 of our facilities into sister plants. We are adjusting inventories and we are controlling expenses. By year-end, we were back to nearly 50% gross margin for the company. We expect to be complete our rebalancing and streamlining activities by the end of Q2. And from there, we anticipate that margins will improve as our volumes improve over the next few years. So moving now to our Q4 business results. As you saw in our press release this morning, we delivered $156 million in revenue with our base business, which excludes COVID and M&A, up 1% sequentially, down 13% year-on-year and down 9% for the full year.
Base revenue highlights in the fourth quarter included modest year-over-year growth and nice sequential growth for both our Analytics and Protein franchises, as well as the aforementioned positive impact from new modality accounts. At a customer level, our non-COVID Q4 pharma revenues which includes M&A were flat year-on-year. For CDMOs and integrators, Q4 revenues were down 20% and 10%, respectively, compared to Q4 of 2022. Metenova came in right on track at $5 million of revenues in Q4. The team continues to work through the early phases of integration. We are happy with the progress we are making and expect to further integrate Metenova mixing solutions into our Fluid Management portfolio as we go through the year. Moving to orders. Base business orders for the fourth quarter were up 3% year-over-year.
Non-COVID orders for the fourth quarter were up 6% year-over-year. From a customer perspective non-COVID pharma and integrated orders were flat year-on-year, but CDMOs were up greater than 20%, both year-on-year sequentially. The order performance in Q4 is very encouraged, especially at CDMO accounts where we are starting to see some early signs of recovery. Moving now to franchise-level business highlights. In Chromatography, our year-over-year revenues were down approximately 25% in the fourth quarter and down 4% for the full year. The fourth quarter decline was primarily driven by the higher mix of columns versus resin demand. On orders, Chrom was down 4% for the quarter and for the full year 2023. The opportunity for our OPUS product lines continues to increase.
And for 2024, we expect Chromatography revenue growth in the range of 0% to 5%. In Protein, our year-over-year revenues were up 7% in the fourth quarter and down 9% for the full year. Our Protein franchise had a solid revenue and orders quarter driven by growth factors and Custom Affinity Resins. That said, we expect weak demand for Protein in 2024, reflecting the Cytiva drop-off of approximately $10 million and lower forecast for ligands from our other customers, including the discontinuation and ramp-down of some legacy resins by one of our partners. This is the one franchise where we see excess finished goods inventory in the channel, and we think it will take 2024 for this to reverse. As our Protein forecast in 2024 will be down 30% to 35%, we expect the Protein business to have a strong bounce-back year in 2025 as new products targeting antibody and antibody fragment purification gained traction.
We have built a market-leading set of ligands over the last 2 years, firmly establishing ourselves as the technology leader in this space, and we will be working closely with Purolite to drive market adoption for these products. In Filtration, our year-over-year revenues were down approximately 20% in the fourth quarter and 30% for the full year. The declines were driven by the drop-off in COVID-related revenue, which was approximately $23 million in Q4 of 2022 compared to $8 million in Q4 of 2023. Filtration orders in Q4 were again strong with a book-to-bill ratio of 1.03. Excluding COVID contributions in Q4, our Filtration book-to-bill was 1.13 driven by strong demand for XCell ATF, ARTeSYN systems and Fluid Management assemblies. With a strengthening order book, our expectation in 2024 is that this franchise will be up 10% to 15% on our base business or 5% to 10% on a reported basis.
Finally, our year-over-year Analytics business was up 2% in the fourth quarter of 2023 and up 6% for the full year. We're seeing solid orders for Analytics, which were up 10% for the year. The Analytics story of the quarter and the year was the strong traction for our FlowVPX and our RPM product lines and the continued adoption of VPE technology by new modality accounts. As the markets pick up, we expect the Analytics business to grow 10% to 15% in 2024. In summary, despite the headwinds in Proteins, our other 3 franchises combined, are showing solid growth potential in 2024, projected to be up 9% on base business and 6% as reported at the midpoint of our guidance. So what do we expect to see as we move through the year? As we have repeatedly stated over the last 6 months, we see 2024 as a transition year for the company and the industry, and we don't expect a full recovery until the second half of this year.
We do expect revenues in the first half of 2024 to be modestly better than the second half of 2023. We believe the strength we've seen in orders over the last 6 months supports our ability to reach our 2024 revenue targets, including $300 million in the first half. We expect stronger revenues and orders in the second half of the year with revenues in H2 projects to be up 10% to 15% over H1 or $335 million at the midpoint of our guidance. All in, our guidance for 2024 is in the range of $620 million to $650 million, up 2% to 7% for non-COVID business with M&A contributing 3 points of growth. We also expect that we will return to double-digit revenue growth for our businesses in 2025. We believe that the increased emphasis we've placed on commercial execution is really helping to reshape and expand our opportunity funnel.
The stronger funnel, combined with our investment in the key account management team along with an improving book-to-bill environment provides some real momentum as we head into 2024. As we move through the year, our strategic priorities will center on the following. Number one is to further expand our opportunity funnel and strengthen our order position on top accounts. Two, is around launching new products with a focus on Fluid Management and integrated PAT systems. Three, is around building up our wins in new modality markets. Four, is around successfully integrating Metenova into Repligen and launching a portfolio of mixing solutions in the marketplace. And finally five, is around controlling our costs and increasing our margins as we go through the year.
In summary, we are happy to be moving forward here in 2024. We have the right team and expertise in place across all aspects of our business from operations to finance to commercial. We'll continue to focus on bringing flexibility and efficiency to bioprocessing through internal R&D and M&A. We've entered 2024 with a stronger balance sheet and a care plan for delivering long-term reward for our shareholders. Now I'd like to turn the call over to Jason for the reports on our financial performance.
Jason Garland: Thanks, Tony, and good morning, everyone. Today, we reported our financial results for the fourth quarter and full year of 2023 and provided financial guidance for 2024. As we expected, revenue in the fourth quarter stepped up nearly [indiscernible] million over third quarter low point. We delivered total revenue of $156 million, with approximately $8 million of COVID sales in the quarter. This is a reported decline of 17% for the fourth quarter or down 21% on an organic basis, which excludes the impact of acquisitions and currency fluctuations. Our total year 2023 revenue was $639 million, aligned with our October guidance. This was a year-over-year decrease of 20% as reported and down 21% on an organic basis.
FX provided a slight tailwind in the quarter. And for the total year, FX had a negligible impact of less than 30 basis points of growth headwind. For the total year, our base business, which excludes COVID revenue and M&A, was down 9% on a reported basis. We recognized $32 million of COVID revenue and approximately $7 million in M&A sales from our FlexBiosys and Metenova acquisition. Therefore, our base sales were $599 million. Included in the $599 million is just over $10 million of ligand sales to Cytiva which will be negligible in 2024. Tony shared the revenue performance of our franchises, but let me highlight the revenue performance across our global regions. For context, the total year 2023, North America represented approximately 44% of our global business, while Europe and Asia Pacific and the rest of the world represented 37% and 19%, respectively.
The challenges of the year were global in nature, and we saw declines across all regions, but Europe demonstrated the most positive momentum in the quarter. Year-over-year, on a reported basis, sales declined in North America by 20% for the fourth quarter and by 19% for the total year 2023. Europe was flat for the quarter, but down 19% for the year. And Asia Pacific was down 35% for the quarter and down 26% for the total year. China remained as the most significant driver of the region's decline, down 62% in the fourth quarter and down 41% for the total year 2023. Fourth quarter 2023 adjusted gross profit was $77 million, a 20% decrease year-over-year and nearly $31 million of lower revenue, delivering a 49.1% adjusted gross margin. Though still down about 2 percentage points versus the fourth quarter of 2022, this was a 700 basis point increase from the third quarter.
This increase was driven by approximately 300 basis points from our lower level of inventory adjustments in the third quarter, 200 basis points from positive mix from higher Protein and COVID Filtration sales, 200 basis points from improved labor and overhead efficiencies and higher leverage on depreciation and capacity costs. With this fourth quarter, adjusted gross margin [indiscernible], total year gross margin was 49.5%. This is down 750 basis points from 2022 and $163 million of less revenue. As Tony shared earlier, we have remained focused on cost management and rebalancing our resources through the second half of 2023. The majority of our restructuring actions will be complete within the first half of 2024, but we will remain diligent on our spending, investment prioritization and we will remain focused on driving productivity and efficiencies across our manufacturing network.
That said, for 2024, we expect our gross margin to remain at the 49% to 50% level. We believe we are turning the corner on profitability based on the actions we have taken in 2023 and will continue to take in 2024, coupled with higher leverage on increasing volumes going forward. Related to our actions, we incurred $8 million of restructuring charges in the fourth quarter, down from $24 million of charges in the third quarter. This was mostly driven by noncash charges related to inventory revaluation and facility consolidations. All of these charges are nonrecurring in nature and are reflected only in our GAAP P&L in the fourth quarter and total year. Though our current restructuring activities are primarily complete, we evaluate the need for future discrete actions as we continue our margin expansion journey.
Continuing through the P&L, our adjusted operating income was $19 million in the fourth quarter, down $22 million compared to the prior year. This is driven by the $20 million drop in adjusted gross profit just described with only a slight increase in SG&A from our investment in our sales organization. Total year 2023 adjusted operating income was $94 million, down 59% on lower sales and gross margin, offset by a nearly $3 million year-over-year reduction in total operating expenses. Total year adjusted SG&A was down 1% on a reported basis and adjusted R&D spend which is slightly down year-over-year as we essentially held our investments in technology development flat, while continuing to introduce innovative new products. Our total year 2023 operating income margin of 14.8% includes about a 5-point headwind from depreciation, which was only a 3-point headwind in 2022.
This is reflective of the critical investments we have made in our capacity. For total year 2023, EBITDA margin rate was 20% and more reflective of our profitability excluding the impact of the increased depreciation. Adjusted net income for the quarter was $19 million, down $20 million versus last year. Total year adjusted net income was $98 million, down $90 million. This was driven by $138 million drop in adjusted operating income, and that drop was offset by just over $25 million of higher interest income, net of interest expense from our improved interest rates on our cash position and approximately $20 million less tax provision. Our total year adjusted effective tax rate was 16.2%. This tax rate benefited from the efficient use of cash in our Swedish operation related to the funding of our Metenova acquisition in the third quarter and from stock-based compensation.
We have not assumed a repeat of these benefits in 2024. Adjusted fully diluted earnings per share for the fourth quarter was $0.33 compared to $0.68 in the same period in 2022. Consistent with our October guidance, our total year adjusted fully diluted EPS was $1.75, a year-over-year decline of 47%. Finally, with operating cash flow generation and the proceeds from our convertible debt exchange, we ended the quarter with $751 million of cash and cash equivalents. I'll now move to our guidance for total year 2024. I'll speak to adjusted financial guidance. So please note that our GAAP to non-GAAP reconciliations for our 2024 guidance are included in the reconciliation tables in today's earnings press release. And for further clarity, our guidance is fully inclusive of the FlexBiosys and Metenova acquisitions we made in 2023.
As Tony shared earlier, our revenue for 2024 is expected to be in the range of $620 million to $650 million. We expect 2% to 7% on growth for our non-COVID business with M&A contributing 3 points of that growth. As a note, we will not be reporting on COVID sales in 2024, as this will be de minimis. As Tony shared, we expect revenues in the first half of 2024 to be better than the second half of 2023, and we expect revenue for the second half of '24 to step up again. As I mentioned earlier, we expect to deliver adjusted gross margins in the range of 49% to 50%, essentially flat with 2023. We see about 200 basis points of headwind from mix with our reduced Protein sales forecast, salary increases, material inflation and from resetting our incentive compensation back to normal levels for our employees in 2024 after being far below that in 2023.
The impact from these headwinds is expected to be entirely offset by the manufacturing productivity, which is forecasted to generate roughly 200 basis points of year-over-year adjusted gross margin improvement. I'll also note that price is assumed to be flat this year though we may raise prices selectively. We expect our adjusted income from operations to be between $83 million to $88 million or 13% to 14% adjusted operating income margin rate, which is down about 100 basis points from our midpoint from 2023. In our adjusted operating income, we see line of sight to delivering 400 basis points of year-over-year productivity. However, total salary increases, material inflation, mix from lower Protein sales and volume deleveraging creates greater than 300 basis points of headwind.
And the headwinds from resetting our incentive compensation is a total of 200 basis points of headwind at the adjusted operating income level with the majority of our incentive costs in SG&A. We remain focused on balancing our cost structure, taking immediate actions while protecting the resources and investments needed to grow long term. As our volume grows, we expect profitability to grow with it. Adjusted EBITDA margins are expected to be in the range of 18% to 19% for the year, reflective of the exclusion of roughly 500 basis points of headwind fixed depreciation costs and the critical capacity expansions we have made. Continuing down the P&L, we expect our adjusted other income to be down year-over-year by an estimated $4 million to $5 million.
This reflects the favorable but higher coupon on our convertible debt, increasing from 0.375% to 1.0%. It also reflects an assumption that interest rates that we earn on our money market cash investments will reduce through the course of 2024 as most forward forecasts indicate a similar profile. Our 2024 adjusted effective tax rate is expected to increase to an estimated 21%. This increase versus 2023 ending rate of 16.2% is driven by the 2023 benefits that I cited earlier and not repeating in 2024 related to the acquisition funding and stock-based compensation. Incorporating all of these items, we expect our adjusted earnings per share to be between $1.42 and $1.49, down 33% to , respectively, versus last year. Approximately half of this reduction is from lower operating income and the other half is from both lower other income and the increased tax rate.
We've entered 2024 with a stronger balance sheet with $751 million of cash and cash equivalents. We will remain prudent in our spending while maintaining flexible dry powder. Our FX spending is expected to be flat to down 5% versus 2023. After 2023, was cut by more than 50% off of our 2022 peak spend. Now as we wrap, let me reiterate our excitement to move forward in 2024 and our optimism about the bioprocessing market improving through the course of the year. We will remain laser-focused on the execution of our strategic priorities, continuing to expand our position in top accounts, delivering more innovation with differentiated new products, building up our wins in new modalities, successfully integrating Metenova and remaining diligent on our cost control and productivity to support increasing margins as we go through the year.
With that, I will turn the call back to the operator to open the lines for questions.
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